The Nasdaq (^IXIC) was the worst-performing major index for the month of September (down 5.2%). More specifically, the three worst-performing stocks on the Nasdaq for September were Pinduoduo (PDD 6.06%) (down 16.6% in September), DocuSign (DOCU -0.92%) (down 3.5%), and Splunk (SPLK 0.14%) (down 14.2%). All three are technology companies featuring products or services that can help life go on amid a global coronavirus pandemic and its related shutdowns.
Does this bad September performance suggest more trouble to come for these three companies, or is it time to buy in October?
The Nasdaq's worst performers
What do these three Nasdaq September laggards do? Pinduoduo is the largest e-commerce platform in China. The other two, DocuSign and Splunk, are software companies that help enable remote productivity, something that has been made more necessary in this time of social distancing. In a pandemic, the value of remote shopping, signature-writing, and online productivity has risen significantly, and the three organizations' high stock valuations right now reflect that.
Like many other tech companies, these three all fetch price-to-sales (P/S) multiples over 10 (a good price-to-sales (P/S) ratio is between 1 and 2) while growing revenue by 45% or more each year. While one can't directly compare these valuations with the Nasdaq Index, it is possible to compare them to the Invesco QQQ Trust (QQQ -0.76%), an exchange-traded fund (ETF) that has proportionate holdings in all the stocks in the Nasdaq. The trust currently trades for an average of 4.16 times P/S and expected to grow revenue by 17% this year. Based on those metrics, the Nasdaq's three biggest September losers are still comparatively pricey growth investments.
Generally, expensive growth companies must continue to boast rapid expansion in order to continue justifying the elevated sales multiples that Pinduoduo, DocuSign, and Splunk all have. the effects of COVID-19 helped boost that needed growth for these companies, but it's likely that tailwind won't be blowing forever.
A potential COVID-19 vaccine in 2021
Management at both Pfizer and Moderna have said the results of their COVID-19 vaccine trials will be known by the end of this month. Several other companies, including Johnson & Johnson, are close behind in their vaccine development. All in all, over 130 vaccine candidates are currently in clinical or preclinical trials. Only one of these candidates needs to be approved and production scaled up to effectively shorten the pandemic's duration. The federal government has already purchased millions of doses of the most promising candidates to expedite distribution once a vaccine is approved. It is widely expected broad distribution could take place in the first half of 2021.
An effective vaccine would mean a quicker return to normal. An end to social distancing would be excellent news for the economy as a whole. But it would not be good for tech companies like the three mentioned above whose revenue growth acceleration coincided with pandemic-induced efforts to keep people at home. A pandemic resolution will likely diminish the necessity for electronic signatures, online shopping, and remote work.
What to do?
This all is not to say that Pinduoduo, DocuSign, and Splunk (or other companies getting a boost from the COVID-19 pandemic) are bad long-term investments. In fact, the digitization trends that were accelerated by the pandemic will most likely not go away whenever life can finally return to normal. They will just slow to their prior rate.
As we are potentially nearing the end stages of this pandemic, now may not be the right time to go all-in on these stocks. Growth most likely will continue, but the pace of expansion will begin to normalize as the world does. As such, there may be better opportunities elsewhere than to start or add to your position in these stocks.
Investors should be patient when considering these three companies or any other company enabling remote living and productivity. The inevitable end to the pandemic will remove some of the tailwinds that a large chunk of technology companies currently enjoy. That does not bode well for the Nasdaq's three worst-performing September stocks.