What happened
Shares of Latin American e-commerce platform MercadoLibre (MELI 0.58%), communications software platform Twilio (TWLO 0.88%), and automation software company UiPath (PATH 1.09%) fell hard in January, losing 16%, 21.7%, and 15.3% of their respective market values last month.
There weren't any major financial releases from any of these three companies in January. In all likelihood, the decline in these stocks had completely to do with fears over higher interest rates. If rates move higher than expected, growth stocks would be worth less because of the higher discounting of future earnings.
Image source: Getty Images.
So what
In January, the Bureau of Labor Statistics released December inflation numbers that showed a 7% increase over the prior year, well above the Federal Reserve's target rate of 2%. The persistently high inflation numbers led many investors to anticipate a faster path of interest rate increases. Thus, many sold off high-multiple, profitless tech stocks en masse, almost regardless of how a company's respective business was performing.
While MercadoLibre is consumer-facing and Twilio and UiPath are business software applications, all are high-growth tech stocks that trade at high multiples. MercadoLibre trades at over 100 times its 2022 earnings estimates, and both Twilio and UiPath are losing money on their bottom lines. Meanwhile, the stocks trade at 8, 12, and 21 times sales, respectively. Those multiples are all well below where they used to be; however, investors are now really sharpening their pencils on profitability and away from mere revenue growth, trying to discern when those profits may arrive, and how large those ultimate profit margins will be.
Meanwhile, both UiPath and Twilio are printing heavy net losses. Last quarter, UiPath's operating loss nearly doubled to $116.2 million. Twilio's nearly doubled, too, to $232.3 million. MercadoLibre's margins are actually improving, but they are still low today; in addition, MercadoLibre is still burning through cash because of the capital-intensive buildout of its delivery and logistics footprint across the region.
In addition to interest rate concerns and multiple compression, investors may also be worrying about revenue deceleration this year. During the pandemic, e-commerce companies such as MercadoLibre saw a boom in sales as people socially distanced and flocked to online solutions. Meanwhile, the accelerated digital transformation at enterprises during the pandemic probably provided tailwinds to Twilio and UiPath as well.
Some suspect that that the omicron variant wave will be the last big wave of COVID, although that's still uncertain. But as the pandemic recedes, it's possible these high-growth stocks could see a deceleration in revenue, on top of higher interest rates. Of note, while Twilio grew revenue 65% last quarter, some of that came from acquisitions. "Organic" revenue growth was 38%, a deceleration from the 50% growth seen in the prior quarter and the lowest rate since the fourth quarter of 2019.
MELI Percent Off All-Time High data by YCharts
Now what
After a brutal January, each of these stocks is more than 50% off its all-time high, with UiPath and Twilio 60% off their all-time highs. Yet it is difficult to know if these stocks are bottoming out now, as none look "cheap" by conventional metrics.
If inflation stays elevated and the Federal Reserve raises rates aggressively, I have a hard time seeing any of these stocks trading back to their highs anytime soon. However, each is a well-run company that's a leader in its field. Therefore, those with a long time horizon may want to investigate each of these companies this year in more detail, to prepare for buying opportunities with an eye toward the long term. Of course, if inflation comes down a lot quickly, these stocks may also stabilize and begin rising again.
However, the market is being choosier and more skeptical today amid tightening financial conditions, so buyers of these stocks really need to have conviction around each company's competitive advantage, growth potential, and ultimate profitability. In addition, investors should try to form an opinion of the intrinsic value of these stocks as best they can. If you have strong opinions on these details and think the stocks are now bargains, than by all means, invest. However, the uncertainty right now is still too great for me to recommend these stocks outright at these levels, even after a rough January.
