What happened
Shares of Appian (APPN 0.19%), Fastly (FSLY -0.47%), Fiverr International (FVRR 1.34%), and LivePerson (LPSN 2.10%) were all sliding this week as high-priced growth stocks largely pulled back on inflation concerns. There was no major news out on these stocks, but with June's consumer price index report showing inflation was hotter than expected, fears of tightening monetary policy from the Federal Reserve seemed to have cooled off these pricey stocks.
Through Thursday at 1:19 p.m EDT, Appian was down 13.9% for the week, Fastly had lost 12.6%, Fiverr had given up 12.5%, and LivePerson was down 9.9%. ARK Innovation ETF, one proxy for high-growth stocks, was off 7.5%, showing growth stocks were pulling back broadly.
Image source: Getty Images.
So what
All four of these stocks fell sharply on Tuesday when the CPI report came out, showing consumer prices had risen 0.9% from May to June, above estimates, after a monthly jump of 0.6% in May. On a year-over-year basis, prices were up 5.4%, which was the largest increase in the CPI since August 2008.
The categories driving the index higher weren't directly related to the tech companies above. Prices for used cars and gasoline were up 45% over the last year, while transportation services increased 10%.
The issue at hand for stocks like Appian and Fastly isn't price increases in their particular sectors, but how inflation will affect interest rates and the Fed's decision-making. Growth stocks like these benefit from low interest rates as it causes investors to value long-term profits more highly. When interest rates rise, investors' discount rates do as well and unprofitable stocks like these are worth less since the value of cash flows 10 years from now falls. Rising interest rates also makes fixed income like bonds more attractive, and investors tend to rotate out of stocks into bonds as rates go up.
Interest rates didn't rise in response to the CPI report, but investors still grew more fearful of a tightening monetary environment even as Fed Chairman Jerome Powell again tamped down concerns about raising the benchmark Fed funds rate. He also continued to insist that inflation would be "transitory."
For Appian, Fastly, Fiverr, and LivePerson, the questions around inflation and interest rates are important because they are all high-priced, unprofitable stocks.
Appian, a cloud computing company that makes low-code software, is currently trading at a price-to-sales ratio of 30, and has been highly volatile since November as the stock tripled with the help of a short squeeze and then gave back most of those gains. Fastly has experienced similar volatility after shares of the content delivery network jumped last summer as demand for its services took off. Its price-to-sales ratio is now 19.
Fiverr has been another pandemic star, connecting gig workers and freelancers with employers, but it trades at a sky-high P/S ratio of 36. Like Appian and Fastly, it's down more than a third from its all-time high. Finally, LivePerson, which provides chatbot technology for businesses, is valued at a more modest P/S of 10, but the company is still significantly unprofitable with an operating loss of $41 million, or more than 10% of its revenue over the last four quarters.
Now what
With earnings season, attention will likely turn to how these stocks and their cloud-based peers performed in the second quarter. However, investors should keep one eye focused on the macro environment as rising interest rates and rising inflation could continue to pressure these stocks.
