What happened
Shares of Salesforce.com (CRM -0.57%) dropped 17.1% in April as part of a growth-stock sell-off. Rising interest rates are pulling capital away from riskier assets, while investors are starting to worry that tighter monetary policy from the Federal Reserve will lead to slowing economic activity.
So what
There wasn't any major news regarding Salesforce.com in April. The company had an excellent earnings report in the first week of March, but things have been pretty quiet ever since.
Image source: Getty Images.
Unfortunately for investors, growth stocks are the biggest victims of the current market correction. Stock valuations reached the highest levels since the dot-com bubble during the pandemic bull market, but that wasn't sustainable. Rising interest rates and fears of a global economic slowdown are weighing on the market as a whole. Stocks with aggressive valuations are getting hit especially hard as investors are losing risk appetite and applying much more scrutiny to high-risk, high-reward assets.
That's apparent if we compare the price charts of Salesforce.com and the Vanguard Growth ETF (VUG -2.25%) in April. The Vanguard Growth ETF didn't decline as steeply as salesforce.com, but the two securities were clearly correlated and followed nearly identical paths.
CRM and VUG Total Return Level data by YCharts
It's also clear that Salesforce.com didn't decline because of a huge shift in fundamental outlook. The stock's price-to-sales ratio fell from 7.8 to 6.5, while its forward P/E ratio dropped from 45 to 38. It wasn't a case of investors' changing their estimates on future cash flows for the company. Instead, the company is considered less valuable relative to those future cash flows.
CRM PS and Forward PE Ratio data by YCharts
Now what
Long-term investors should be interested any time that a stock's price falls without any major news on the company, as it's suddenly much cheaper to get exposure to the company's future profits. This is the cheapest that Salesforce.com has been in years.
But if you're thinking about buying some shares, make sure you're ready for more volatility over the next few months. It's going to take some time for macroeconomic turmoil to get sorted out, and market conditions will continue to be challenging for growth stocks in the meantime. It could also be a rough few quarters for Salesforce.com if slowing economic activity causes its customers to reduce their investments in technology. These are all temporary issues, but they aren't going away anytime soon.
