What happened
Shares of Palantir (PLTR -0.84%), Okta (OKTA -0.10%), and MongoDB (MDB -2.10%) were falling hard today, down 8.1%, 6.2%, and 7.1%, respectively, as of 3:50 p.m. ET.
The pullback in these names occurred on a bad day for high-growth technology names, as once again, the specter of once-in-40-year inflation reared its ugly head, fueled by a new home price report and rising oil prices. When that happens, high-multiple growth names like these three tend to suffer, even if their businesses are performing well.
So what
There wasn't any material news out of any of these companies today; in fact, there has been nothing but bullish commentary on all three recently from the analyst community. Last week, Piper Sandler analyst Weston Twigg raised his price target on Palantir to $16, up from $15, on optimism the big data analytics company would be winning more business from the U.S. government. Two weeks ago, analysts at Morgan Stanley saw an "attractive entry point" for Okta shares, after they had fallen following an unfortunate data breach, which turned out to be smaller than first thought. Meanwhile, MongoDB has also been getting bullish commentary over the past month, ever since its blockbuster earnings report in March smashed expectations, with analysts at UBS saying the disruptive database company's moat over rivals was widening.
So what's the problem? Well, the S&P CoreLogic Case-Shiller national home price index revealed home prices soared nearly 20% in February, marking an acceleration. Oil prices also rose today on the back of further saber-rattling from Russian officials, and explosions were reported in Moldova, a region to the south and west of Ukraine.
Rising inflation and a potential extension of the war in Ukraine are not good for high-growth, high-multiple stocks, even those that have been performing well at a business level. That's because uncertainty about long-term interest rates means uncertainty for the intrinsic value of earnings far out in the future. Given that none of these companies makes a profit today, that's where the entirety of their value lies.
Image source: Getty Images.
Now what
It could continue to be a difficult time to own profitless growth stocks, even after their recent correction. That's because these names still trade at a high multiple of sales; Palantir and Okta still trade around 15 times sales, and MongoDB still trades at 27 times sales. So, it's going to be years before these companies make significant profits, despite booming revenue growth today. Unfortunately, we are going from the pre-pandemic era of low growth and low interest rates to what appears to be a higher-inflation, higher-rate regime in a relatively short amount of time. That's what's causing this sudden value compression over the past six months, and it could continue as long as the Federal Reserve tightens financial conditions.
However, once the Fed stops hiking rates and either pauses or reverses course, these stocks could take off again. Given that each is operating at a very high level, investors should put them on their watch lists and be ready to pounce when that happens. However, such a reversal could be months, quarters, or even years from now.
