What happened
Shares of many hard-to-value growth stocks in the cloud computing sector surged in April 2020. According to data from S&P Global Market Intelligence, cloud-scale systems monitoring specialist Datadog (DDOG 4.95%) rose by 25.4%, just behind a 25.5% gain for cloud communications technologist Twilio (TWLO 1.47%). Online freelancing coordinator Upwork (UPWK 3.40%) left them both behind with a gain of 29.2%.
So what
These stocks have a lot in common, beyond working as cloud-based services designed to improve other companies' day-to-day operations.
- All three have optimized their business model for top-line growth, spending most of their incoming revenue on research and development, marketing, and other growth-promoting efforts rather than collecting profits.
- These net margins are printed in red ink, but the corresponding top-line growth trajectories are impressive. Twilio's quarterly sales rose 57% year over year in the company's latest report, and Datadog's revenue skyrocketed 85%. Upwork trailed the pack at a still-impressive 22% year-over-year growth rate.
- The lack of earnings makes it difficult to pin down a reasonable market value for high-powered growth stocks of this caliber. Upwork is trading at 8.4 times the company's book value, which looks downright reasonable next to Twilio (37 times book value) and Datadog (163 times).
- None of these companies had any news of market-moving importance to share in April. The closest thing to a significant news nugget came from Twilio, when the company inspired a bullish analyst note on April 15. Other than that, crickets and tumbleweed all around.
- These three stocks bounced back from sharp drops in March, ranging from 20.3% for Datadog to Upwork's 25.6% decline. None of them ended April more than 4% away from the prices they saw at the start of March.
Image source: Getty Images.
Now what
Here's another common denominator among these three cloud computing stocks: Their deep plunges in March all looked overdone.
Upwork and Twilio reported earnings in the first week of May, resulting in skyrocketing stock prices the next day. Twilio's stock surged 41% higher in a single day after crushing Wall Street's estimates across the board. Both Datadog and Upwork have gained more than 25% since the end of April. Investors who fled growth stocks for the safety of value investments, gold, or plain old cash in March are returning to these high-quality businesses again.
It's not all blue skies ahead, though. Keep in mind that the high-growth sector remains vulnerable to another round of safety-seeking behavior if a premature return to normal life triggers a second spike in coronavirus infections. Be careful out there.
