It’s been a rough three months
Due to surging inflation, the first three months of 2022 ended up being the worst quarter for the US government bond market since 1973, with the Bloomberg US treasury total return index losing 5.6%.
The US equity market also had a difficult quarter, with the S&P 500 index dropping 4.9%. This was the worst performance by the index since early 2020, and there have been only three worse quarters for the index over the past decade. Commodity markets were a spot of green in the sea of red, with the US energy sector jumping 39% for the quarter.
The list of worst performers in the S&P 500 index was headed by EPAM Systems, which was covered in last month’s column. Let’s take a closer look at the other stocks rounding out the bottom five for the quarter.
Etsy
Etsy owns and operates four “noncommoditised” e-commerce sites, which means that the focus is on unique goods, rather than on massproduced items. Its marketplace site offers handmade, vintage and craft goods for sale. Etsy has carved out a profitable niche for itself by attracting small-scale sellers who would otherwise be crowded out on other marketplace sites. It’s a capital-light business model, since items are shipped directly from sellers to buyers, rather than being stored in expensive warehouses. Etsy charges sellers a total take rate of 15%-20%, which compares favourably to other marketplace sites. Discontent about fees is rising, though — Etsy’s recent announcement of an increase in transaction fees from 5% to 6.5% has been met with fierce resistance. Sellers are trying to coordinate a strike. If it fizzles out, the episode would prove that Etsy does have pricing power, making the shares attractive after their 43% drop for the quarter.
PayPal
The digital payments processor gained scale between 2002 and 2015 as a subsidiary of eBay, becoming the default payment method for the majority of the online auction site’s users. With more than 425-million active accounts, total payment volume of over $1.2-trillion and revenues approaching $30bn, PayPal has cemented a leading position as a global payments network and digital wallet. Merchant payments, peer-to-peer transfers and cross-border trade are all growing strongly. PayPal shares are down 39% over the past quarter, and admittedly reached a bubble-like valuation last year when the shares were trading more than 150% higher than they are now. Still, if PayPal can continue to grow revenue strongly, the shares are good value here.
Netflix
When CODA won the Oscar for best picture recently, it was the first time that a movie distributed by a streaming service (Apple TV+, in this case) won the award. It certainly won’t be the last, judging by the mammoth sums of money that streaming services are spending on movie production nowadays.
Netflix has a commanding position in both movies and series. With more than 220-million subscribers worldwide and an expanding repertoire of local content to stave off the competition, Netflix is still leading the pack. You wouldn’t think so from the recent share price performance, though — the stock is down 38% over the past quarter on the back of disappointing guidance. We think this offers a buying opportunity.
IPG Photonics
This global market leader in fibre laser technology was founded in 1990, employs more than 6,000 people and has a market capitalisation of more than $5bn. Fibre lasers have displaced old-technology carbon dioxide lasers in various use cases and are increasingly also displacing other nonlaser applications, for example in precision metal cutting. Profit growth has been curbed over the past three years as global manufacturing spend has slowed down. The emergence of Chinese fibre laser competitors that have narrowed IPG’s technological lead has also dented profits. But the most pressing issue for IPG is that a large part of its manufacturing base (and 30% of employees) are based in Russia.
Due to sanctions and logistical constraints, the company is trying to shift production to facilities in Western Europe and the US as soon as possible, but the process is expected to take six to nine months. In the meantime, the share price has been hammered, falling 36% for the quarter. Investors are anxiously watching to see if IPG can maintain its technological and cost advantage after pulling out of Russia. If it can’t, expect a few more tough quarters ahead.