Please ensure Javascript is enabled for purposes of website accessibility

Many Cloud Computing Stocks Look Affordable After Crashing in September

By Anders Bylund - Updated Oct 10, 2019 at 6:27PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Steeply valued growth stocks in the software-as-a-service market plunged last month. That might be good news for opportunistic investors.

What happened

Many cloud computing specialists saw their share prices tank in September, according to data from S&P Global Market Intelligence. E-commerce platform operator Shopify (SHOP -0.51%) fell 19.1%, team communications specialist Slack Technologies (WORK) dropped 17.1%, and content delivery expert Fastly (FSLY -2.68%) took a 24.1% hit.

So what

These companies have a few things in common:

  • They all run services tailored to business users rather than consumers, focusing mostly on the needs of small to medium-size businesses.
  • Their services run online, managed by the service provider rather than the end user. This form of cloud computing is known as software as a service.
  • Their revenues are skyrocketing. Fastly's sales rose 34% year over year in the recently reported second quarter. Slack's revenue surged 58% in the same quarter. Shopify's second-quarter sales rose 48%.
  • The stocks all trade at lofty price-to-sales ratios ranging from Fastly's 14 times trailing revenue to Shopify at 27 times. I can't refer to P/E ratios here because the companies are reporting negative earnings so far. Their sky-high valuations rest on rampant growth trends rather than solid profits.
  • Crucially, September was a fairly quiet month for all of these companies -- at least in terms of bad news. Slack did report earnings, crushing Wall Street's expectations across the board. Shopify's biggest news was a cleanly executed secondary stock offering. For Fastly, I found no market-moving news at all in September.
Young woman in business attire, sitting at a desk with a confused demeanor.

Image source: Getty Images.

Now what

High-flying growth stocks often act exactly like this, making big moves for no apparent reason. In this case, investors worried about the ongoing trade struggles between Washington and Beijing, inspiring a few market makers to move some assets out of these growth stocks and into something safer.

There's nothing wrong with that, just a common wrinkle in the fabric of Wall Street. On the upside, falling share prices only hurt if you're locking in the low prices by selling in a panic. More-adventurous investors may see these discounts as an opportunity to start or expand their holdings in Shopify, Fastly, and Slack. Many analysts issued rosy reports on these stocks in September, echoing exactly that core idea.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Fastly, Shopify, and Slack Technologies. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$40.81 (-0.51%) $0.21
Fastly, Inc. Stock Quote
Fastly, Inc.
FSLY
$11.27 (-2.68%) $0.31
Slack Technologies, Inc. Stock Quote
Slack Technologies, Inc.
WORK

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.