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Why Amazon, Etsy, and Carvana Stocks Dropped Today

What happened

Tuesday is looking more like "Lose Day" for investors in e-commerce stocks, as a chorus of downbeat analyst notes sink the sector, and send shares of e-commerce kingpin (NASDAQ: AMZN), online artisan marketplace Etsy (NASDAQ: ETSY), and online used car retailer Carvana (NYSE: CVNA) tumbling.

As of 12:30 p.m. ET, Amazon stock has lost 4.4%, Etsy is down 6%, and Carvana is leading the whole e-commerce sector lower with a 13.9% loss.

So what

What's Wall Street saying to spook the market today? Let's take these one at a time. Shareholders in Amazon can direct their hate mail toward UBS today, as the Swiss megabank cuts its price target by 20% to $167 per share. Granted, that still implies a mammoth 55% profit for investors who hold on to Amazon shares for the next 12 months. In the meantime, however, things could look rough for Amazon. UBS warns that even a "mild" recession could depress e-commerce sales 5% to 15% below what other analysts are forecasting -- with profits perhaps suffering even more.

Etsy: Bad as that sounds for Amazon, things could be even worse for Etsy. Here, investment bank Guggenheim is slashing its price target 42% to $101 a share -- but again, recommending investors buy the stock, because $101 implies a 33% gain from today's Etsy share price. Guggenheim expects that in 2023 Etsy will earn about as much as it earned in 2019 -- and that's the good news. The bad news is that Etsy earned only $96 million in 2019, which would value the stock at about 100 times earnings today.

And the worse news is that 2023 profits could "obviously ... be much worse" than 2019 profits if the recession gets really ugly, reports

Carvana: Saving the worst news for last, investment bank Stifel Nicolaus today cut its price target on Carvana by 29% to $34 a share. This still implies a 30% profit from today's prices, but surprisingly, that prospect isn't enough to entice Stifel to buy Carvana shares (which it rates only a hold).

Stifel warns that as interest rates rise, the cost of capital needed to fund money-losing businesses like Carvana (which has never earned a profit) has reached levels higher than "anytime in the past 20 years." This makes it crucial for companies that have leaned heavily on outside financing in the past to now figure out a way to earn a profit and fund their growth internally.

Now what

And this may be the biggest takeaway for investors today -- as well the theme that ties all of these wildly different e-commerce companies together. As Stifel explains it, the e-commerce companies that make it through this recession intact, and survive to thrive on the other side, are going to be blue chip companies that earn enough profit to reinvest in their businesses.

That may rule out Carvana, I fear, which not only hasn't yet reached profitability -- but actually burned through $3.4 billion in negative free cash flow over the last 12 months, a cash loss much worse than its reported $359 million net loss as calculated according to generally accepted accounting principles (GAAP) would suggest.

What's a better e-commerce option than Carvana, though? is probably the first name that jumps to mind, but consider: Although it's GAAP-profitable, Amazon suffered $24.6 billion in cash burn over the last 12 months. Amazon can certainly tamp down its cash burn rate by ratcheting back capital investment going forward (Amazon spent nearly four times as much on capital expansion in over the last 12 months as it spent in 2019, for example). But Amazon is a very big ship -- $1.2 trillion in market cap -- and changing its direction is going to take time.

Instead, if you're looking for a fast-growing e-commerce stock (20% growth projected, according to S&P Global Market Intelligence) that's generating plenty of cash ($547 million in free cash flow last year) and in no immediate need to borrow more money, Etsy stock just may be your best bet.

At less than 19 times free cash flow, Etsy looks to me like a real "growth at a reasonable price" bargain, and the best bargain of these three stocks that are getting sold off today.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Etsy. The Motley Fool has a disclosure policy.


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