What happened
On an otherwise positive day for the S&P 500 and Nasdaq, tech stocks Snowflake (SNOW -1.99%), Twilio (TWLO -1.49%), and Skillz (SKLZ -1.63%) were going in the other direction. Each stock was down more than 5% to start today, although they had recovered to down 1.9%, 3.5%, and 4.6%, respectively, as of 1:09 p.m. ET.
Shareholders can thank sell-side analysts for today's relative underperformance, as downgrades and price target decreases across these three names seem to be the culprit. In addition, long-term rates rose slightly, which caused many high-growth, low-profit stocks to underperform.
What happened
Snowflake reports earnings on Wednesday. Ahead of those figures, it appears analysts at UBS, Cowen, and Jefferies all thought it time to get their price targets closer to Snowflake's current share price under $140. UBS lowered its price target from $260 to $180, Cowen lowered its target from $390 to $280, and Jefferies lowered its target from $230 to $150.
Many analysts update their price targets before earnings to give a pre-earnings take for their clients. Likely, the changes reflect growing macroeconomic concerns of higher interest rates and perhaps slower growth as the Federal Reserve tries to tamp down inflation. Valuations have compressed for much of the high-growth space over the past six months, reflecting higher interest rates. After falling for much of the past two weeks, the 10-year Treasury bond yield was also up 7 basis points to 2.85% as of this writing. The 10-year Treasury acts as a baseline for many investors' discount rates they apply to future earnings. Snowflake is a hypergrowth software stock that is currently losing money, with profitability well out into the future, so it is very sensitive to long-term interest rates.
Jefferies analysts cut Twilio from $175 to $130, likely for similar reasons. Once again, the culprit appears to be multiple compression across the software space, enhanced by the economic reopening turning investors away from software and communications stocks, especially "pandemic darlings" like Twilio. Though it grew a nice 48% last quarter, Twilio has lost nearly $1 billion on its bottom line over the past 12 months, when factoring in stock-based compensation. In this environment, investors seem to be less tolerant of firms that generate those kinds of losses, no matter how fast they are growing.
Finally, mobile e-sports company Skillz saw its price target slashed at Citigroup from $5 to $2.10, versus a share price of just $1.76 today. The downgrade reflects concerns not only over valuation compression in the high-growth space, but also concerns over Skillz's operating performance. Skillz grew handily during the pandemic, but late last year, concerns grew over its massive marketing expenses, such as player incentives and discounts, which actually exceeded revenue in 2021. This year, management has pledged to lower marketing spend in an attempt to limit losses, but that is is clearly coming at the expense of revenue growth, which was up just 12% in the first quarter after growing 65% last year.
Image source: Getty Images.
Now what
The common thread among each of these downgrades is that they are very late, and seem to be playing catch-up to the lower share prices across the board. Unfortunately, this is quite common with sell-side analysts. While some analysts will make bold contrarian calls and provide useful information, many are reactive to the share price after the fact. Therefore, investors should never just blindly follow sell-side analyst moves in either direction.
Yet while analysts were late in downgrading these stocks, could they now be a contrarian indicator of turnarounds in each of these three names? Certainly, if one liked Snowflake, Twilio, or Skillz at higher prices, and if your thesis hasn't changed, you should like these stocks even more down here. However, investors should be aware of their own valuation estimate, and one based on estimates of long-term cash flows, not just revenue.
The lesson here is that you can't depend on sell-side analysts to tell you where a stock is going, either to the upside or the downside. If you invest in a stock, you should know it as well as any analyst, and have your own ideas of a business's potential growth prospects, paths to profitability, and intrinsic value.
