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Why Chewy, Pinterest and Etsy were plunging today

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What happened

Shares of e-commerce names Soft (CHWY -5.07%), pinterest (PINS -4.70%)and Etsy (ETSY -5.49%) were falling sharply Tuesday to start the year, down 5.5%, 4.9% and 6.3%, respectively, as of 12:30 p.m. ET.

There wasn’t much company-specific news today, so the sell-off appears to be sector-specific. All three of these stocks are trading at high multiples of their earnings or not profitable at all, and these types of stocks are having a tough time in the new world of higher interest rates.

Further, investors seem to be anticipating an economic slowdown or recession following these interest rate hikes, and some comments from economists and Federal Reserve officials over the holidays and today fueled those same fears. .

With consumers stocking up on goods during the pandemic, some may fear poor sales and earnings numbers, especially for these pricey consumer discretionary stocks, in the upcoming earnings season.

So what

Over the holidays and today, a slew of commentators predicted a recession in 2023. International Monetary Fund chief Kristalina Georgieva appeared on Confront the Nation last weekend, and predicted a global recession this year due to synchronized rate hikes from multiple central banks. Additionally, while stronger economies such as the United States may circumvent the official definition of a recession, Georgieva also said that even if it weren’t an official recession, “it would look like a recession for hundreds of millions of people”.

Then on Tuesday, former Federal Reserve Bank of New York President William Dudley spoke to Bloomberg, calling a recession “very likely.”

These are just a few of the leading economic thinkers predicting a downturn this year. Worse still for Chewy, Pinterest, and Etsy, these names are mostly tied to somewhat discretionary products. Etsy’s e-commerce platform is mostly made up of handmade goods, while Pinterest’s digital ad revenue is also mostly tied to home, wedding, and other discretionary categories that people browse. on the platform. These types of purchases can be held back during lean times.

Chewy may be in the best position to weather a drop in discretionary spending as pet owners won’t stop buying food for their pets; however, prospective pet owners may delay buying or adopting a new pet, or they may opt for less expensive types of food.

Therefore, while Chewy, Pinterest, and Etsy have already fallen 37.6%, 36%, and 46% over the past year, respectively, and while all of these companies have exceeded expectations in their earnings reports of the third quarter, investors may have a difficult time gauging a bottom in these types of stocks.

Since they trade at higher earnings multiples or have little earnings relative to more predictable mature stocks, and such future earnings are highly uncertain in 2023, it is perhaps unsurprising that these stocks are very volatile in this uncertain environment.

CHWY 1-Year Total Returns Chart (Daily)

CHWY 1 Year Total Returns (Daily) data by YCharts

Now what

It’s hard to know what to expect for these three stocks in the near term, but longer-term investors may want to consider putting each of these stocks on their watch lists. The macro environment, with higher rates and recession fears present at the same time, is about as bad as it gets for these types of consumer growth names.

However, each business operates quite well on its own terms. Etsy is actually profitable and has carved out a seemingly defensible niche in handmade and “specialty” products. Chewy reported strong numbers and customer satisfaction is very high. Meanwhile, Pinterest has a new CEO from Alphabetas well as an activist investor involved in Elliott Management, which has just named one of its portfolio managers to the board.

So while these stocks may fall further if the economy goes into a recession, investors with a longer-term orientation may want to buy stocks if they do. After all, even William Dudley quoted above suggested in the same Bloomberg interview this morning that if the US goes into a recession, it’s most likely to be superficial and short-lived.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Billy Duberstein has positions in Alphabet and has the following options: short January 2023 $80 puts on Alphabet. Its clients may hold shares of the companies mentioned. The Motley Fool posts and recommends Alphabet, Chewy, Etsy and Pinterest. The Motley Fool has a disclosure policy.

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