What happened
Shares of e-commerce stocks like Chewy (CHWY -2.54%), Etsy (ETSY -0.22%), and Carvana (CVNA 2.88%) rose Monday, propelled by a combination of bullish macroeconomic news and strong gains from some of their peers.
Chewy closed the session up by 5.1%, Etsy finished the day 5.5% higher, and Carvana gained 10.3%. Meanwhile, the tech-heavy Nasdaq Composite index rose 2%, outpacing both the S&P 500 and the Dow Jones Industrial Average.
Image source: Getty Images.
So what
The rally seemed to be fueled in part by an article published by The Wall Street Journal that said that Federal Reserve officials are set to slow their pace of interest rate hikes for the second time in a row at next week's meeting, and will raise the federal funds rate by 25 basis points (0.25 percentage points). The article also said that Fed officials would soon begin discussing when to pause rate hikes.
In December, the Fed projected that it would implement just 75 basis points of interest rate hikes this year, implying that its aggressive adjustment of monetary policy is mostly over as the U.S. economy seems to be responding to its prior hikes. Inflation is coming down and there are signs of sluggishness in consumer spending.
Additionally, shares of online furniture seller Wayfair climbed by 27% Monday as it got a slew of analyst upgrades after announcing a cost-cutting plan. Analysts at both Bank of America and JP Morgan double-upgraded Wayfair stock Monday morning from sell to buy. Additionally, Shopify stock jumped following an analyst upgrade. That analyst made their move based on signs that enterprise adoption of Shopify Plus, the e-commerce software company's highest-priced tier, should accelerate in 2023.
Share prices in the e-commerce sector plunged last year as rising interest rates and slowing relative growth due to difficult year-over-year comparisons crushed the industry. Monday's strong gains from Wayfair and Shopify show that investors may be beginning to regard the online retail sector as oversold, especially if sales momentum improves in 2023. Additionally, an end to the Fed's rate hikes would also favor the sector -- and Chewy, Etsy, and Carvana in particular. All three of those companies have struggled to achieve GAAP profitability and are therefore more sensitive to interest rates since investors expect that their profits will arrive further in the future, making them less valuable in the present as interest rates go up.
Chewy has been struggling as the boom it experienced earlier during the pandemic has given way to slower growth as more Americans have reverted to their pre-pandemic spending tendencies on activities like travel. However, Chewy continues to grow. Its revenue rose 14.5% to $2.53 billion in its most recently reported quarter, and it was profitable on an adjusted EBITDA basis with a margin of 2.8%. With most of its customers on auto-ship -- meaning they get consumables regularly sent to them automatically -- the company should be more resistant to a recession than other pet products retailers. The stock is still down 63% from its peak in 2021, indicating it has plenty of room to recover when market sentiment shifts.
After posting triple-digit percentage revenue growth during the first two years of the pandemic, Etsy's growth ground to a halt in 2022. Gross merchandise sales actually declined in its most recent quarter. Higher interest rates not only impact its valuation, but also potentially make it more expensive for its sellers to do business, as they raise the cost of borrowing using credit cards and loans. In addition, inflation has made materials more expensive. The company also took a $1 billion write-down in its most recent quarter on its acquisitions of Depop and Elo7 -- that further weighed on the stock.
However, Etsy's competitive advantages as the preferred online marketplace for handmade and unique goods are still intact, and its growth should return as comparisons get easier. The stock is down 53% from its 2021 peak, giving it ample room for recovery.
Finally, Carvana is more sensitive to interest rates than most e-commerce stocks. The company is fighting for its life as used car prices have plunged, leaving it with billions of dollars worth of depreciating inventory at a time when it has nearly $7 billion in debt on the balance sheet.
Rising interest rates are hurting the company in a number of ways. First, they make buying a car more expensive for anyone who needs to take out an auto loan. That's pushing prices even lower and also limiting the pool of potential borrowers. Higher interest rates will also make it more expensive for the company to refinance its debt as it comes due -- if it can refinance it at all. Carvana's stock price has plunged 98% and much of the market is betting on its bankruptcy. If the company can survive, there is upside potential in the stock, but it will need help from interest rates and improving macroeconomic conditions.
Now what
With earnings season about to kick off, these stocks could get further boosts if companies report better-than-expected numbers. Investors will be watching reports from Microsoft and Tesla this week for insights into the tech sector.
Both Etsy and Carvana have earnings reports coming up in the next few weeks, and both are likely to swing on those reports -- but especially Carvana. Still, Monday's movement shows how sensitive these stocks are to the macroeconomic climate, and more good news on the interest rate front is likely to send them higher.
