What happened
Online retail stocks crashed in Wednesday trading, with Stitch Fix (NASDAQ: SFIX) sliding 9.1%, Etsy (NASDAQ: ETSY) off 9.3%, and Farfetch (NYSE: FTCH) falling farthest of all -- down 9.7%.
The reasons for the sell-off aren't immediately obvious -- but I think we can find a clue in PayPal Holdings' (NASDAQ: PYPL) disastrous earnings release last night.
Image source: Getty Images.
So what
PayPal only "missed earnings" by a penny in last night's fourth-quarter report, and the fintech giant actually beat on revenue, reporting $6.9 billion when Wall Street analysts had only expected $6.86 billion. Then again, Q4 2021 earnings weren't really the problem at PayPal.
The problem was what it predicted it will earn in 2022.
Specifically, PayPal warned that its adjusted earnings for the current fiscal year could fall as much as $0.65 short of Wall Street's expected $5.25 per share, and revenue, despite growing in the mid-teens, will probably miss the Street's target as well.
Weaker revenue from eBay, as the former PayPal parent company shifts away from using PayPal as its preferred payments provider, is one reason for the expected shortfall. But as CNBC pointed out today, PayPal also pointed to "exogenous factors" including weaker cross-border spending due to supply chain issues and inflation concerns that are discouraging consumers from spending, as weighing heavily on its results.
Now what
Now why would these PayPal problems be hurting shares of Stitch Fix, Etsy, and Farfetch? Two reasons.
First and generally, sellers such as Stitch Fix, Etsy, and Farfetch won't likely be able to sidestep the same weak trends in cross-border payments, and consumer spending that prevented PayPal from beating earnings last quarter, and that PayPal warned will hurt it in the coming year. Second and more specifically -- and for this you need to do a bit of digging -- it turns out that each of Stitch Fix, Etsy, and Farfetch offer PayPal as one of the payment methods on their websites.
Thus, it's even more likely that the weakness PayPal predicted for its own business will affect these three retailers in particular. Their ties to PayPal make it relatively more likely that these three stocks will turn out to be vulnerable to consumers reining in spending in response to inflation, for example -- and that's a reason for investors to be nervous.
It only makes sense, therefore, that these three stocks would follow PayPal down a bit today -- and investors in Stitch Fix, Etsy, and Farfetch should perhaps just count themselves lucky that their stocks aren't falling as much as PayPal.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Etsy, Farfetch Limited, PayPal Holdings, and Stitch Fix. The Motley Fool recommends eBay and recommends the following options: short January 2022 $82.50 calls on eBay. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
