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Shares of Farfetch Limited (FTCH 1.96%), DoorDash (DASH -3.36%), and The Beauty Health Company (SKIN -1.07%) rocketed higher on Wednesday, rising 9.2%, 10.3%, and 9.4%, respectively.
What do a luxury goods website, a food delivery app, and a high-tech facial beauty company all have in common? They are discretionary purchases people make when they have more money to spend, with DoorDash a time-saving luxury, as opposed to picking up your own food or making it at home.
Consumer luxuries have been under pressure, as U.S. consumers have been navigating 40-year-high inflation coming out of the pandemic. These stocks also doubly suffered based on recent fears the Federal Reserve would have to force the economy into a nasty recession in order to slay rising prices for good.
However, today’s July consumer price index (CPI) reading from the Bureau of Labor Statistics showed an easing of inflationary pressures, allowing investors in these services to breathe a sigh of relief.
Beauty Health also reported earnings last night; however, given the synchronous moves in these stocks, it was likely the larger macroeconomic forces moving the stock today.
Wednesday’s CPI report showed total inflation up 8.5% year over year in July, which was below expectations of 8.7% and well below June’s 9.1% reading. Encouragingly, the month-over-month figures showed a 0% change in inflation, perhaps signaling a rolling-over of the worse-than-anticipated inflation coming out of the pandemic. Stripping out volatile food and energy prices, “core” CPI came in at 5.9%, below expectations of 6%. The core figures did increase month over month by 0.3%, but that was the lowest monthly increase since March.
Moderating inflation combined with last week’s red-hot jobs report provided hope that perhaps the Federal Reserve can pull off the elusive “soft landing,” in which it raises rates to cool inflation and the economy, but not so far as to force a recession, with widespread job losses.
Inflation and interest rates are not only important to consumer spending, but also the interest rates companies can get on their debt, as well as the discount rate investors use to discount future cash flows in their valuations. That’s also important to Farfetch, DoorDash, and Beauty Health because these three are still relatively young high-growth companies that don’t make material profits yet. Therefore, higher interest rates provide a double-whammy of lowering consumer spending power while also lowering the value of their future cash flows.
Meanwhile, Beauty Health’s second-quarter numbers were actually quite good last night. Revenue surged 55.7% year over year, ahead of analyst expectations. While diluted losses per share came in at $0.05, slightly worse than expectations, that was due to increased investments in growth. Arguably more important, management raised its full-year revenue guidance range from between $330 million and $340 million to between $340 million and $350 million. The strong results defied analyst estimates despite declines in the Asia-Pacific region, as Beauty Health’s Chinese business was negatively affected by COVID-19-related lockdowns.
While consumers may be pulling back on goods purchases, which could harm Farfetch, it appears they are still shelling out for beauty as people return to out-of-the-home activities. Of note, DoorDash also reported a revenue beat when it reported earnings back on Aug. 4, although its losses also widened. So while inflation is a concern from a valuation and cost structure standpoint, demand for these services still appears strong. Farfetch will report earnings on Aug. 25.
While today is only one day, and July was only one data point, it could mark the start of a general easing of inflationary pressures. The Federal Reserve only began hiking rates in March, and ratcheted up the pace in June and July. Those hikes will take time to work their way through the economy, but it appears as though some of that tightening is beginning to take effect.
The question on everyone’s minds is if the Fed will tip the economy into recession. But with last week’s better-than-expected jobs report and today’s easing inflation figures, perhaps the elusive “soft landing” is achievable. With DoorDash and Beauty Health down 42.1% and 45.6% on the year, respectively, and Farfetch down a stunning 70.8%, even after today’s rise, these three are promising turnaround candidates if you think the economy can avoid a recession.
Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends DoorDash, Inc. and Farfetch Limited. The Motley Fool has a disclosure policy.
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