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Starbucks, SaaS Stocks Weigh Down Nasdaq

By Dan Caplinger - Jan 27, 2021 at 3:09PM

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The stock markets were broadly lower on Wednesday.

The stock market has moved aggressively higher for months, but investors hit an air pocket on Wednesday. Some Wall Street pros have been taken aback by the massive short squeeze in well-known stocks, and that has raised new uncertainty in the current environment. Just after 2:30 p.m. EST, the Nasdaq Composite (^IXIC 0.00%) was down more than 2%.

Earnings season continued apace, and investors in Starbucks (SBUX -0.33%) weren't entirely happy with what they saw. Meanwhile, many stocks in the software-as-a-service realm saw deep declines early Wednesday but regained much of their lost ground in the afternoon.

Starbucks gets cold

Shares of Starbucks were down more than 6% Wednesday afternoon. The coffee giant reported fiscal first-quarter results that showed signs of recovery but weren't able to match the high expectations of its shareholders.

Person handing coffee cups across a counter to customers.

Image source: Getty Images.

Some of the news wasn't good. Starbucks reported a 5% drop in comparable store sales globally, with a similar drop in the U.S. due primarily to plunging numbers of transactions. It took a 5% rise in comps in China to help cushion the blow, and even there, traffic flow was down from year-ago levels. The weak comps sent revenue down 5% year over year. Adjusted earnings per share fell 23%.

However, there were some promising signs. Active members in the Starbucks Rewards loyalty program jumped by 15% in the U.S. to 21.8 million, and Starbucks opened 278 net new stores. That brings the network's size to nearly 33,000, evenly split between company-owned and licensed locations.

CEO Kevin Johnson believes that Starbucks made a good start to the new fiscal year as it positions itself to recover from the pandemic. Innovation both in beverages and with respect to customer interaction is paying dividends, and even if shareholders couldn't fully appreciate that, it bodes well for Starbucks' longer-term future.

Can these high-flyers bounce back?

Elsewhere, the whole software-as-a-service (SaaS) realm took some sizable hits early in the session but bounced back. Among investor favorites were:

  • CrowdStrike Holdings (CRWD 4.84%), down 2% after having fallen as much as 6% earlier.
  • DocuSign (DOCU 8.32%), falling 3% and recovering from a nearly 5% drop.
  • Datadog (DDOG 3.40%), which recovered from a 5% decline to be down just 3%.
  • Okta (OKTA 4.71%), which was off 2% after bouncing from a 4.5% loss.
  • Workday (WDAY 3.62%) wasn't able to bounce back from its 5% drop.

A few Nasdaq stocks in the SaaS realm managed to recover all of their losses and then some. Zoom Video Communications (ZM 8.48%), for instance, traded up 1% after having fallen as much as 4% earlier in the session.

Many investors are increasingly worried about how much further SaaS stocks can run. After having been the darlings of 2020, many of them have reached extremely expensive valuations. Even with brisk growth prospects, it's hard for many investors to reconcile their share prices with the business results they're likely to produce in the years ahead.

Today's price action in SaaS stocks doesn't necessarily mean that they're bound to crash in the near future. What's likely, however, is that after a prolonged period of outperformance, the sector could take a pause and yield stock market leadership to some other group of stocks. Eventually, though, if the growth hopes investors have for these companies gets realized, the share prices could climb further from here.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
$72.48 (-0.33%) $0.24
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$11,264.45 (0.00%) $0.00
Workday, Inc. Stock Quote
Workday, Inc.
$164.51 (3.62%) $5.74
Okta Stock Quote
$82.57 (4.71%) $3.71
DocuSign Stock Quote
$77.70 (8.32%) $5.97
Zoom Video Communications Stock Quote
Zoom Video Communications
$102.34 (8.48%) $8.00
CrowdStrike Holdings, Inc. Stock Quote
CrowdStrike Holdings, Inc.
$146.64 (4.84%) $6.77
Datadog, Inc. Stock Quote
Datadog, Inc.
$88.73 (3.40%) $2.92

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

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