In late 2021, as inflation surged due to a combination of fiscal stimulus, elevated money supply, and historically low interest rates—measures implemented by governments and central banks to stimulate economies following the pandemic-induced slowdown—internet retail companies saw growing sales figures, which fueled significant increases in stock prices.

However, as central banks shifted their focus towards combating inflation, long-duration assets in the Internet retail industry began to suffer sharp declines. The anticipated rise in the federal funds rate led to downward pressure on valuations, which had been inflated by unrealistic extrapolations of short-term sales growth.

Fig 1: Performance 1YR Horizon

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Fig 2: Sales Growth [1YR Rolling]

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By September 2024, this predicted valuation contraction had fully materialized, with internet retail stocks underperforming both the broader consumer cyclical sector and the overall market by over 40% and 80%, respectively, on an equal-weighted basis.

As central banks now prepare to transition towards an easing cycle after achieving what many argue is a "soft landing," a potential opportunity may be on the horizon. In 2021, consumer behavior briefly shifted, resulting in a sharp but temporary surge in demand for e-commerce, which, in turn, drove speculative investors behavior.

This speculative frenzy pushed internet retail valuations to historic highs. However, the industry's inherent cyclicality, combined with a shift in consumer spending toward discretionary categories like travel and experiences, and the impact of monetary tightening on excess savings, contributed to the underperformance of both the consumer cyclical sector and the broader market.

In Q2 2021, median price-to-sales ratios for the internet retail industry were three times higher than those in the consumer cyclical sector. The heightened cyclicality became evident in the stark contrast in sales growth rates from Q2 2021 onwards, with the internet retail industry experiencing steeper declines.

Fig 3: Operating Margin [1YR Rolling]

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Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

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While net income figures for the consumer cyclical sector remained positive and stable, the internet retail industry saw negative net income following the initial pandemic-driven sales boom.

Despite the expectation of worsening macroeconomic conditions in the short term, the significant decline in valuations within the Internet retail industry may present an attractive entry point. With monetary policy poised to shift in response to evolving macroeconomic conditions, there could be an opportunity for an arbitrage play as the market adjusts to the new economic landscape.

Fig 5: Net Income Margin [1YR Rolling]

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Fig 6: Performance [1YR]

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Fig 7: Dividend Yield

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Fig 8: Net Debt To Ebitda [1YR Rolling]

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