Shares of Snowflake (SNOW +2.55%), CrowdStrike Holdings (CRWD +1.03%), and MongoDB (MDB +3.11%) all fell hard again on Monday, down 8.6%, 7.5%, and 8.3% at their daily lows, respectively, before recovering more than half those losses by 2:10 p.m. ET.
There wasn't much in the way of company-specific news today, although MongoDB management did present at the Annual Needham Virtual Growth Conference this morning. However, given its move almost directly in line with other winning growth stocks from the past year, the declines all likely had to do with fears over inflation and rising interest rates. That could hurt the valuations assigned to profitless growth stocks disproportionately.
Image source: Getty Images.
So what
The market may be trying to get ahead of a few consequential events this week. On Tuesday, Federal Reserve Chair Jerome Powell will have his Senate confirmation hearing, and on Wednesday, December inflation data will be released.
Inflation has been on the minds of investors lately. The 10-year Treasury bond yield, which serves as a baseline for discount rates on stocks, has moved a lot just since early December, and spiked in early trading before moderating to around 1.78%. That's compared with just 1.34% at the beginning of December.
Ironically, Snowflake, CrowdStrike, and MongoDB are arguably best-in-class software companies with competitive advantages and long runways for growth. However, the reason they are getting sold off so hard is because their relative business strength had caused their valuations to skyrocket to very high levels as of November. With the Fed beginning to tighten financial conditions around that time, it's no wonder these growth stocks are coming under pressure.
With inflation and the path of rates uncertain, investors are now discounting future earnings by a greater amount in their intrinsic value calculations, relative to earnings and profits today. While Snowflake, CrowdStrike, and MongoDB are each growing strongly, with revenue up 109.5%, 63.5%, and 50.5%, respectively in their recent quarters, none are currently profitable according to generally accepted accounting principles (GAAP). Given the size of their revenue opportunities, these companies are likely to continue to invest in capturing those opportunities, so profits are likely further off in the future.
With those future earnings now discounted by a greater amount purely due to rate fears, each has seen a decrease in their price-to-sales ratio, with Snowflake's falling from over 100 to around 82, and CrowdStrike's and MongoDB's price-to-sales ratios falling from around 50 to the low thirties.
CRWD PS Ratio data by YCharts
Now what
It appears some traders were looking at this week's schedule and sold at the open, as each company has recovered about half their early losses for the day. Still, investors should prepare for more volatile swings given the uncertainty around rates and this week's data dump.
With the stocks now down between 27% and 37% from all-time highs, are they bargains? It's hard to say. If the 10-year Treasury rate doesn't spike too much too quickly, we could be nearing a bottom. However these stocks have actually held up relatively better, believe it or not, than many other high-multiple peers that may not have as strong a business. Many high-multiple software names have sold off 50%, 60%, or even 70% or more from their highs over the past couple months, so that is a real potential scenario, even for these leaders, if inflation and interest rates rise too much too quickly.
That being said, Snowflake appears to have an advantage in the all-important data management segment, CrowdStrike's impressive network effects should give it a durable advantage in the booming cybersecurity market, and MongoDB appears to be disrupting the huge legacy database segment. So these companies should at least go on your watch list, and young investors with a long time horizon without any exposure to these winners should think about starting a position. Just be prepared for potential declines in the near and medium term if inflation comes in hotter than expected and rates rise quickly in response.
