What happened
Shares of IAC/InterActiveCorp (IAC 1.82%), Datadog (DDOG 0.26%), and CrowdStrike (CRWD 0.13%) fell 11.6%, 12.7%, and 15.5%, respectively, in March, according to data from S&P Global Market Intelligence. None of the aforementioned companies reported any significant bad news; in fact, both CrowdStrike and IAC reported good news. Instead, all appeared to fall because of the same market dynamics of rising long-term interest rates and a rotation to cheaper "reopening" stocks.
Image source: Getty Images.
So what
In 2020, technology-oriented growth stocks skyrocketed. Fears over the pandemic caused long-term interest rates to fall. At the same time, the economy leaned more heavily on new technologies amid the stay-at-home economy. Higher growth and lower interest rates increased the value of future earnings for new-age tech stocks, causing many to skyrocket in value.
After a stellar 2020 run, the aforementioned tech stocks were anything but cheap heading into the month. As vaccine rollouts have accelerated, and with the government having passed the massive American Rescue Plan in March, people now believe the economy will reopen more quickly. Long-term rates have moved up, prompting talk of inflation. This reversal has investors pondering decelerating growth and higher discount rates on future earnings of tech stocks. So it's no surprise that these three stocks fell, as investors rotated more toward cheaper "reopening" and cyclical plays.
The sell-off came in spite of general good news among all three companies. CrowdStrike reported its Q4 earnings during the month, posting red-hot 74.2% revenue growth and expanding profit margin, handily beating analyst expectations to cap off an incredible year. CrowdStrike's novel artificial intelligence- and cloud-based cybersecurity platform is clearly catching on with businesses large and small. Notably, SolarWinds (SWI +0.00%) adopted CrowdStrike's solutions following its massive SUNBURST hack.
Meanwhile, IAC didn't have much overall company news, but the holding company did hold an analyst day for its Vimeo business, which the company plans to spin off in the near future. 2020 was a blockbuster year for Vimeo, as businesses large and small turned to its high-quality video solutions to reach customers and employees alike. Subscriber numbers grew 24% in 2020, and revenue accelerated 44%, all while the company inched closer to profitability. Still, management claims Vimeo is just scratching the surface of a $70 billion market opportunity, compared with just $283 million in 2020 revenue.
Meanwhile, March was a quiet month for Datadog, a cloud-based enterprise infrastructure and network monitoring software company that also saw results skyrocket during the pandemic. However, in February, Datadog gave somewhat conservative guidance for 2021, forecasting just 37.5% growth, down from 66% growth in 2020, and even lower adjusted (non-GAAP) operating earnings than it posted last year.
Now what
Though each of these companies had a rough month, investors should keep in mind that none are bad companies. CrowdStrike and Datadog are becoming hugely popular services to monitor and protect more distributed corporate workforces in the cloud -- a trend that will linger on beyond the pandemic. And IAC should continue its impressive track record of nurturing and then spinning off winning internet businesses.
Of course, even after their sell-offs, no one would describe these stocks as cheap, and 2021 could continue to be a tough year for these types of stocks. Yet for long-term-oriented investors, you could do far worse than holding on to these high-quality tech stocks beyond the economy's reopening, with an eye on the next decade, not just the next few months.
