Why International E-Commerce Stocks Were Soaring Today

What happened

Shares of international e-commerce stocks were soaring on Tuesday, with Latin American leader MercadoLibre (MELI -1.79%), Korean e-commerce leader Coupang (CPNG 0.35%), and European luxury goods e-commerce platform Farfetch (FTCH) all up big today, rising 5.4%, 9.5%, and 9.7%, respectively, as of 1:25 p.m. ET.

It was a good day for beaten-down e-commerce stocks, as some leading indicators of inflation were down. Long-term bond yields also declined, which is good for growth stocks, and the dollar weakened against a basket of currencies, which helps the value of international stocks to U.S. investors. Combined with e-commerce stocks having been severely punished this year, it's no wonder these names are seeing a big overdue bounce.

In addition, another different U.S. e-commerce stock, Poshmark (POSH), received an acquisition offer yesterday from South Korean tech giant Naver. It's always nice to have someone else validate a positive outlook on your sector, so that could be another factor driving e-commerce stock gains today.

So what

2022 has been a perfect storm for e-commerce stocks, as the reopening is allowing customers to return to in-person stores, while inflation is causing a rapid rise in long-term bond yields.

Obviously, the first is problematic for e-commerce stocks, and doubly bad if these companies spent too much money on growth, hiring, and logistics capacity amid the pandemic-fueled boom, thinking the growth would last forever. That means these stocks have lower revenue on a higher cost base in 2022.

The second is also problematic, since virtually every e-commerce stock is a growth stock with little or no current profits. So when long-term Treasury Bond rates rise, that heightened discount rate on future profits decreases the value of future cash flows. The further out in the future those profits and cash flows are, the less they're worth when rates go up.

While e-commerce stocks in the U.S. have suffered, international e-commerce stocks, especially those listed on U.S. exchanges, were hurt even more by a third factor: the strong dollar. As the Fed has led the world in raising interest rates amid a red-hot U.S. economy, the dollar has strengthened against a basket of currencies this year. That means revenue earned in foreign currencies is worth less in U.S. dollars, all else being equal.

With these factors, it's no wonder that these three stocks have fallen this year, despite their leadership positions in their respective categories, solid execution, and long growth runways.

Today, however, those headwinds showed signs of reversing. Recent inflation indicators such as housing prices have come down, and today's Job Openings and Labor Turnover Survey (JOLTS) declined by 1.1 million openings, more than expected. That is actually a good thing, since JOLTS had been almost double that of unemployed workers for months, indicating a tight, inflationary labor market.

These indicators show inflation may be beginning to come down, which would mean the Fed won't have to raise rates as fast and as hard as it has indicated. In response, the 10-year Treasury bond yield fell today, reaching 3.62% as of this writing, well below the 4% mark it breached as recently as last week.

Furthermore, the Dollar Currency Index, which measures the U.S. dollar against a basket of other currencies, weakened today, down 1.26% 110.33 as of this writing, down from its recent high of 114. That's still well above the 96 mark at which it started the year, but a positive indication that the strong dollar may be peaking as well.

Finally, Naver offered to buy fashion resale platform Poshmark for $1.2 billion yesterday. The all-cash offer is certainly surprising given how badly e-commerce stocks are doing, and since the U.S. dollar is so strong against the South Korean won. However, it is just a 15% premium to Poshmark's closing price yesterday, so the price may not be that taxing on Naver.

That doesn't necessarily affect these three stocks, which are larger than Poshmark and unlikely to be acquired by a tech giant. However, it does validate the long-term case for e-commerce stocks, which should reassure some beaten-up e-commerce investors today.

Now what

All three of these three e-commerce stocks look like fairly good deals today, especially if inflation is sustainably on the downturn. Even though there has been a reversal in e-commerce buying as the world emerged from the pandemic, e-commerce seems destined to take a larger share of overall retail over the long term. Thus, next year could be much better on easier comps.

All of these three market leaders are also very well run and are doing interesting, innovative things in their respective markets. I'm especially interested in Farfetch's recent transaction this summer, in which it took a large interest in its biggest competitor. That could pave the way for a more dominant position in the online luxury space, which is a younger e-commerce market than general retail.

With MercadoLibre down 59%, Coupang down 76%, and Farfetch down 90% from all-time highs, this is an area investors should be looking for big upside, provided you believe inflation is peaking and will soon come down markedly.