What happened
Shares of high-growth software names MongoDB (MDB -2.02%), HubSpot (HUBS -0.06%), and DocuSign (DOCU 0.55%) fell hard today, down 7.6%, 8.2%, and 8.6% as of 3:45 p.m. ET, respectively.
There wasn't any material news out of these companies today; however, it appears last night's earnings pre-announcement from tech peer Snap (SNAP 4.71%) is being extrapolated to many tech stocks, especially those that cater to small businesses and other tech start-ups.
So what
Last night, Snap issued a mere paragraph-long statement, saying, "Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated. As a result, we believe it is likely that we will report revenue and adjusted EBITDA below the low end of our Q2 2022 guidance range."
That statement was all the excuse investors needed today to dump anything related to digital advertising, marketing, or even technology -- especially stocks that don't make current earnings and trade at relatively high price-to-sales ratios.
These three stocks had already come down a lot amid rising inflation and interest rates, as many growth stocks with their profits far out in the future have been hit hard. Rising interest rates tend to raise the discount rates investors use on future earnings, so higher rates will depress the intrinsic value of growth stocks disproportionally.
However, long-term interest rates were actually down today, with the 10-year Treasury bond yield falling 10 basis points to 2.75%. So, higher interest rates likely weren't the concern today, but rather concerns over an economic slowdown or recession, stemming from Snap's announcement.
While the aforementioned growth stocks would likely still grow at a good pace in an economic downturn, those growth rates could slow materially relative to the last two years. Given that many digital companies like these three saw outsized growth during the pandemic, growth rates could slow even more than investors anticipate.
In fact, DocuSign already saw this dynamic manifest back in March, when it issued first-quarter guidance that was materially lower than Wall Street expectations, revealing a big deceleration over the pandemic-fueled quarter a year ago.
While DocuSign has felt a slowdown already, MongoDB and HubSpot have not. In fact, both companies reported stellar revenue beats in their recent earnings releases, while also issuing strong guidance. However, it appears that investors don't think the good times will last. MongoDB is a disruptive database company, but still needs to increase subscriptions, or "seats" with its customers. The same goes for HubSpot, which sells its marketing and customer relationship management software to small and medium-sized enterprises.
Both of these companies' products have been genuine hits with customers, but if the economy slows and their customers institute hiring freezes or slowdowns in hiring, as many top tech stocks have already announced, it could put a lid on their growth in the near term.
HubSpot is trading at 11 times sales and MongoDB is trading at 17 times sales, which is down a lot from last year's highs, but still high by historical standards. Therefore, there still isn't much room for error in these top software names.
Image source: Getty Images.
Now what
All three of these stocks have generally been very good from an execution standpoint, and their growth prospects remain solid. However, they had gotten very expensive in the age of lockdown-induced digitization and low interest rates. Now that rates are higher, economic reopening is here, and the Fed may need to slow the economy into a recession to keep a lid on inflation, they are feeling the hangover.
It is nearly impossible to say where these stocks will bottom; it wouldn't surprise me to see them bottom near here, or go much lower. Still, all three belong on your watchlist, given their top management teams and disruptive products. Digitization is slowing down, but it's not going away. Over the long-term, these three stocks should be winners, provided you buy them at the right price.
