What happened
Shares of enterprise software companies Snowflake (SNOW -2.35%), DocuSign (DOCU 0.24%), and Okta (OKTA -1.75%) all fell sharply Friday, ending the session down 6.5%, 7.9%, and 7.8%, respectively.
As has frequently been the case for tech companies of late, the sagging stock prices had nothing to do with any company-specific news, and everything to do with fears about inflation, a rise in long-term yields, and perhaps forced selling on the part of funds being hit with margin calls.
So what
Following the Wednesday release of the minutes of Federal Reserve's last meeting, stocks initially surged. But Friday's decline was a continuation of the momentum from Thursday's brutal sell-off, which came as investors further digested the news. While the market initially reacted favorably to Fed Chair Jay Powell's comments that the Fed wasn't actively considering 75 basis-point hikes to the federal funds rate, some investors may fear that such aggressive moves are needed. If the Fed's current path for interest rate increases proves insufficient to get inflation under control, that could necessitate more hikes later.
Friday morning's jobs report also showed the economy remains hot, with the U.S. adding a better-than-expected 428,000 jobs in April. However, the labor force participation rate, which had been improving, took a step back. The combination suggests that the labor shortage the country has been experiencing as the pandemic recedes could remain a problem, which could lead to more inflationary pressures.
That being said, it's also a good thing when more people are employed, and labor force participation remains on a general uptrend, despite last month's dip. However, labor force participation among 25- to 54-year-olds remains below pre-pandemic levels.
In response to the day's news, the 10-year Treasury bond yield continued to rise, reaching 3.12% as of this writing. When long-term bond yields rise, investors tend to sell growth stocks that have the bulk of their earnings power well into the future. And while Snowflake, DocuSign, and Okta are delivering solid revenue growth, none of them are profitable today. Now that the Federal Reserve has stopped buying bonds and is getting set to sell some, and long-term yields are rising, investors are selling basically anything that doesn't earn a profit or that seems overvalued based on today's earnings.
Image source: Getty Images.
Now what
Have these stocks bottomed? It's hard to say. Each has been a terrific performer in terms of growth, as enterprises across the spectrum seek new, data-driven solutions such as Snowflake's cloud data lake, DocuSign's digital signature and document cloud, and Okta's security solutions. That being said, these stocks still trade at 40 times sales, 7.5 times sales, and 12.7 times sales, respectively.
Those may have seemed like reasonable valuations when the yield on the 10-year Treasury was under 1%, as it was during an earlier phase of the pandemic. Now that it's above 3% and rising, these stocks are undergoing a brutal re-rating. Only investors with long time horizons should think about jumping into these stocks at these levels -- at least, not until there is concrete evidence that inflation is subsiding.
