I often talk with friends in the ecom space who acknowledge that valuations are low today but expect them to recover to 2016-2021 levels soon, potentially when the Fed cuts interest rates. Hate to burst your bubble, but the Fed isn’t going to save us.

I’ve written extensively about how battered ecom stocks have been in the last couple of years. For example:

  • Warby Parker: Down 78% from peak
  • Allbirds: -98%
  • Figs: -90%
  • Honest Co: -84%

In a period in which the S&P500 is up 12% from its 2021 highs, public ecom stock valuations are down ~75-95% from their 2021 peaks. Private ecom valuations are similarly down.

When I point this out, I’m often told to be patient. After all, people argue, Amazon dropped 95% after the Dot Com bubble burst and is now a colossus. Bank stocks dropped about 85% during the financial crisis and are now doing great.

All true.

But there are also many cases of stock sectors which crashed and then just never recovered.

For example, I remember when deal sites were all the rage. The biggest, Groupon, IPO’d in November 2011 at a $13 billion valuation. Its competitor, LivingSocial, raised at a $6 billion valuation in 2011. Smaller ones like Gilt Groupe, Travelzoo and others attracted significant funding and consumer excitement. But within a few years, the sector had collapsed. Groupon’s stock dropped 86% by 2015 and LivingSocial was sold for effectively nothing. Both were flattered by the 2021 market rally but, critically, neither even came close to recovering to their peak values.

Consider also 3D printing, which was once a Wall Street darling:

  • 3D Systems peaked at a $10B market cap in 2014, now down 97%
  • Stratasys reached $6.5B, now down 95%
  • Voxeljet hit $1.1B, now down 99.8%

Critically, these businesses never got close to their 2012/2013 peaks when interest rates dropped to 0% in 2021.

And this isn’t only a recent phenomenon. Financial history is littered with stock market sector darlings which had meteoric rises, spectacular crashes and then…stayed crashed.

Airline stocks like Pan Am and TWA soared in the 1960s, tanked in the 70s but never recovered even after interest rates dropped in the 80s/90s.

Further back, radio manufacturers were all the rage in the 1920s. Companies like Radio Corporation of America, Zenith, and Atwater Kent each traded at 10x+ revenue multiples, like many DTC companies in 2021. These companies generally survived the Great Depression but never reclaimed their lofty valuations, even after the Fed dropped rates to 1.5%.

What’s the takeaway?

Consider why lower interest rates boost company valuations. Falling rates mean a dollar of profit in the future is worth more in today’s money, increasing the value of the company. There’s a key word in that sentence: profit. Low interest rates raise the value of future profits, but that only helps if people believe the companies will earn a profit in the future. The vast majority of public ecom brands do not earn profits today.

Deal sites and 3D printing companies never reached consistent profitability. Neither did the vast majority of airlines or radio makers. Interest rates are a sideshow–if ecom companies are going to ever be worth much in the public markets, they’ll need to prove they can turn a profit. Show us the money.