Benjamin Graham, the value investor who mentored a young Warren Buffett at Columbia University, once famously said: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."
Unfortunately, many investors ignored that golden rule throughout the pandemic and paid exorbitant prices for unprofitable companies. Instead of valuing companies by their profits, they relied on their sales -- and they eagerly chased high-growth companies with double-digit price-to-sales ratios.
But over the past five months, that feverish voting phase ended, and the weighing phase kicked off again as inflation, rising interest rates, and other macroeconomic headwinds sparked a retreat from riskier stocks.
Many high-growth stocks were crushed during that pullback, and the situation could get even uglier before some of those stocks stabilize. If the current sell-off intensifies into a full-blown market crash, I think investors should keep a close eye on three high-growth stocks -- Shopify (SHOP 1.43%), Snowflake (SNOW -0.91%), and Palantir (PLTR 1.10%) -- which could finally see their valuations reset to attractive levels for new buyers.
Shopify's stock hit an all-time high of $1,762.92 per share last November. Today, it trades at about $450.
The e-commerce services provider lost its momentum for three simple reasons: its revenue growth decelerated in a post-lockdown market, it started ramping up its investments, and its valuations got overheated.
Shopify's revenue rose 86% in 2020 and 57% to $4.6 billion in 2021, but analysts expect just 33% growth in 2022. Its adjusted net income jumped more than 14 times in 2020 and grew 66% in 2021, but analysts expect its adjusted earnings per share (EPS) to decline 45% this year.
Shopify's slowdown isn't surprising since many other e-commerce companies also face tough post-pandemic comparisons, but its platform -- which enables merchants to manage their own online stores, process payments, and fulfill orders -- remains a disruptive threat to dominant online marketplaces like Amazon (NASDAQ: AMZN).
However, Shopify still can't be considered cheap at seven times this year's sales. I suspect the stock will eventually bottom out at about five times sales -- which would roughly match the valuations of other fallen e-commerce leaders like MercadoLibre and Sea Limited.
Snowflake was another pandemic-era darling. The cloud-based data warehousing company's stock traded as high as $405 last November, but it now trades in the high $180s.
Snowflake's stock plunged because its growth was slowing, it remained deeply unprofitable, and its valuations were too high. But even after that precipitous drop, the stock still trades at 28 times this year's sales.
Investors are still willing to pay a premium for Snowflake because its growth rates are stunning. Its revenue surged 124% in fiscal 2021, which ended last January, and grew 106% to $1.2 billion in fiscal 2022.
Its total number of customers rose 44% to 5,944, and its net revenue retention rate increased by 10 percentage points to 178%. Analysts expect its revenue to grow another 66% to $2.1 billion in fiscal 2023.
However, Snowflake won't generate a profit anytime soon, and it could eventually face tough competition from Amazon's Redshift and Microsoft's Azure Synapse, which are both integrated into the two tech giant's larger cloud infrastructure platforms. Snowflake also hosts its services on Amazon and Microsoft's cloud infrastructure platforms -- so it's ironically paying cloud hosting costs to two of its largest competitors.
I admire Snowflake's business, but it's still trading about 50% above its IPO price. I might be interested in buying some shares if it revisits that price, but its valuations are simply too rich for my tastes right now.
The data-mining firm Palantir went public in September 2020 through a direct listing. Its stock started trading at $10, skyrocketed to an all-time high of $39 last January, then took a round trip back to about $10.
Palantir initially caught fire as a "meme stock" during the Reddit-fueled rally in early 2021, but that bubble popped after its valuations overheated. Even after crashing back to its initial price, Palantir still looks pricey at 11 times this year's sales. It also isn't profitable yet.
Palantir's revenue rose 47% in 2020, then increased another 41% to $1.5 billion in 2021 as the accelerating growth of its enterprise business offset the deceleration of its government business. It also ended the year with an impressive dollar-based net retention rate of 131%. It expects its annual revenues to grow by at least 30% through 2025.
Palantir is sticking with that confident outlook because its tools are widely used by U.S. government agencies. It leverages that hardened reputation to bring in more enterprise customers.
I think Palantir's business is well run, but its stock is still too pricey relative to its peers. It also heavily dilutes its own shares with its stock-based compensation. By comparison, Twilio -- which expects its revenue to rise by at least 30% organically over the next few years -- trades at just five times this year's sales. Therefore, I'd only be a buyer of Palantir if its stock gets cut in half again during a market crash.