What happened
Shares of Asana (ASAN 5.68%), Paycom Software (PAYC 2.28%), and Toast (TOST 3.30%) each had a rough January, down 29.6%, 19.2%, and 34.1% for the month, respectively, according to data from S&P Global Market Intelligence.
Aside from a few investor conferences attended by Asana management, there wasn't any company-specific news during the month for any of these companies. As many know by now, high-multiple technology growth stocks plummeted nearly in tandem last month. This was due to concerns over inflation and the path of interest rates.
Image source: Getty Images.
So what
As the calendar flipped to 2021, high-multiple tech stocks almost immediately sold off, a continuation from the decline that began in November 2021, when inflation fears began to emerge in earnest. Those fears increased in January, when the Bureau of Labor Statistics released December inflation numbers that came in at 7% over the prior year. The high numbers for the past few months have spooked investors, who now fear the Federal Reserve will be raising rates faster than expected.
Higher interest rates could lead investors to discount the intrinsic value of future profits by a greater amount, and that discounting will overly affect companies with little or no earnings today, but most of their profits out into the future. Given that we were in a very low interest rate environment, those growth stocks were trading at very high multiples coming into this period. Hence, the big sell-off.
Asana and Toast make losses today. Paycom makes minimal positive earnings and trades at over 100 times trailing net profits. As you can see, each stock has seen its forward price-to-sales ratio decline markedly in recent months on rate hike fears.
ASAN PS Ratio (Forward) data by YCharts
As you can see, Toast is much cheaper than the other two based on a multiple of sales. However, that's a bit misleading, as only 10% or so of Toast's business is composed of high-margin software. Most of its revenue is based on a take rate it receives on payments, and those are lower-margin. Another small portion of its revenue comes from low- or no-margin hardware.
And for all three, there may be concern that after the two-year boom in digital transformation technology spending, growth may slow as the pandemic recedes.
Asana helps businesses streamline workflows, enabling greater productivity; Paycom is a cloud-based software suite that helps small and medium businesses manage their employees and payroll; and Toast helps restaurants digitize their operations and payments. So, all three companies saw high demand during the pandemic. Now, there may be doubts as to whether that will continue in 2022.
Now what
What to do with these types of stocks? It's hard to say, and a lot will depend on the path of inflation and interest rates. If one thinks inflation will recede as the pandemic does and stimulus fades, they could make for good buys. But if inflation stays high, these stocks may continue to struggle, despite their big declines to date.
Investors looking to these types of stocks need to really understand the businesses, growth potential, and competitive advantage of each. The current growth scare could make some of these stocks bargains, but it will be more difficult for every growth stock to rise this year. Only the unique companies with competitive advantages that can outgrow expectations should be able to overcome interest rate fears in 2022.
