Why Ecommerce Companies Are Burning Cash, and Where the Sector Is Headed
Propelled by Pandemic
The ecommerce sector rose to new heights in 2021. Stimulus checks provided some consumers with extra cash to spend, all while they were largely homebound and, in some cases, spending a lot more time online. Now that conditions have shifted, there’s evidence people are prioritizing services over goods.
This developing trend has forced some ecommerce companies to dip into their cash reserves, a situation some industry analysts describe as potentially troubling, given the current economic environment. While growing companies often face the need to drain cash reserves, if that growth stalls the problem can be exacerbated. The firm may find it difficult to replace those reserves, potentially sending it into a downward spiral.
Buying Cars Online
Digging into the specifics behind what consumers are purchasing, some ecommerce companies may be more at risk than others. For example, the furniture industry has experienced slowed sales growth, which has reportedly forced Wayfair (W) to dip into its cash reserves.
Another sector experiencing a bit of a contraction is used car sales. Throughout the pandemic, used cars hit record highs due to supply chain issues and a shortage of semiconductors. Online used car seller Carvana (CVNA) built its business model on the ability to purchase used cars in bulk, creating the potential to realize profits on individual sales. However, wholesale used-car prices have stabilized recently, limiting their upside. Some industry observers say Carvana and smaller competitor, Vroom (VRM), are both years away from achieving positive free cash flow.
Rising interest rates are another challenge ecommerce companies face. Firms would prefer to raise additional capital from new investors, rather than burn through cash reserves, but that’s increasingly difficult at present. Higher rates tend to make growth-based companies, or riskier bets, less attractive.
Still, many analysts remain bullish on the ecommerce sector, recognizing there are numerous financial headwinds at present, which includes the rising-rate environment. It may be wise to approach cash-burning firms with more caution, until market conditions stabilize.
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