What happened
On Day 2 of a brutal sell-off in tech stocks and high-flying growth names, shares of Stitch Fix (SFIX +1.75%), Twilio (TWLO +0.08%), and Fastly (FSLY +1.45%) were among the losers on Tuesday. Rising interest rates, fear of inflation, and optimism about a quicker-than-expected economic reopening are all leading investors to shift out of risk-on assets into safer trades like bonds and blue chip stocks.
As of 9:52 a.m. EST today, the Nasdaq had plunged 3.5% following a 2.5% drop yesterday, dragging down many of the stocks that have soared over the past year.
At that same point today, Stitch Fix was down 9%, Twilio had fallen 3.8%, and Fastly was off 3.9%, though these stocks recovered some of their losses later in the morning.
Image source: Getty Images.
So what
There was no news about any of these three stocks today. Rather, investors are selling them off in response to broader macroeconomic factors and changes in market sentiment. After nearly a year of bidding up growth stocks, investors may be shifting to prepare for the economic reopening, which will favor cyclical stocks and fixed-income investments due to a rising interest rate environment.
The benchmark 10-year Treasury note briefly rose above 1.38%, its highest yield in a year, signaling rising inflation expectations. Though bond yields are historically low, rising yields tend to beckon investors out of stocks and into bonds, and that is likely to continue as the reopening progresses.
In the last month, daily coronavirus cases have plunged in the U.S., down 75% from the peak in January. Vaccines are now steadily rolling out across the country, with Johnson & Johnson's one-shot dose expected to be approved shortly, and optimism for a reopening is mounting.
All three of these stocks have surged over the past year as their sectors, cloud computing and e-commerce, have been winners during the pandemic. As the chart below shows, all three are up by triple-digit percentages over the last year.
Stitch Fix has been an outlier in this group over the last year as the stock actually underperformed the market for much of the pandemic and its business performance has been generally weak. Though the personalized styling service operates as an e-commerce company, the apparel industry has been hit hard by the crisis, so Stitch Fix's revenue growth has slowed.
But the stock soared following its December earnings report as the company forecast revenue growth as high as 40% in the back half of the current fiscal year. It also benefited from a short squeeze in January, though the price has fallen sharply since then. Though Stitch Fix's valuation may be stretched, the stock has appeal as a reopening play, unlike many of the stocks getting hammered today.
Twilio is fresh off a blowout earnings report last week. The cloud-based communications specialist posted revenue growth of 65% in the quarter to $548.1 million and a dollar-based net expansion rate of 139%, meaning that existing customers increased their spending with Twilio by 39%. The stock jumped on the news as the company also issued solid guidance for the current quarter. But Twilio is still only barely profitable, and its valuation is stretched after the stock has tripled over the past year. It currently trades at a price-to-sales ratio of 36.
Fastly stock sank following the company's earnings report last week. While results were in line with estimates, its full-year guidance called for a wider loss than expected this year. Performance is also getting a temporary boost from its acquisition of Signal Sciences, so its organic growth is even slower than it looks. The provider of cloud-based edge computing services was a big winner early in the pandemic as it became a crucial partner for e-commerce companies and others looking to accelerate web load speeds. Fastly also benefited from the rise of TikTok, its biggest customer. Its shares are pricey, especially since Fastly's growth rate is decelerating, and its P/S is just under 30.
Now what
The last year has been highly volatile for these stocks, and that uncertainty seems likely to continue as no one knows how these companies and the broader market will respond to the economic reopening. At some point, we're likely to see a rotation out of stocks and into bonds, and out of growth stocks and into value or dividend-paying stocks. That movement may not happen for years, however, as Federal Reserve Chairman Jerome Powell promised again today to keep rates low and monetary policy accommodative.
Over the long term, the success of these stocks will be determined by the performance of their underlying businesses, but in the near term, market sentiment is likely to dictate their prices.
