What happened
Shares of cybersecurity firm CrowdStrike (CRWD 0.13%), database disruptor MongoDB (MDB -0.86%), and customer management and online marketing platform HubSpot (HUBS -2.46%) were down big today. As of 2:30 p.m. ET, these stocks were off 8.4%, 10.2%, and 10.4%, respectively.
There wasn't much in the way of company-specific news today; however, last week's inflation reading was enough to spur a big sell-off last Friday and today. While these stocks are still best-in-class and are executing quite well, investors should keep in mind they are also highly valued. That's why they're selling off so much in this market regime change to higher interest rates.
So what
Last week, the May Consumer Price Index (CPI) figures came in hotter than expected, even though the expected numbers were already elevated. Unfortunately, while investors had hoped the March inflation numbers had reached "peak" inflation, that was apparently not the case. More concerning was the "core" CPI, which strips out food and energy prices that were known to be high. That year-over-year figure was 6%, higher than the expected 5.9% figure.
Even though there was a significant sell-off on Friday, it appears more investors are dumping technology names today, especially growth stocks. Growth technology stocks that were bid up over the past few years of COVID and low interest rates are still getting hit very hard, despite being down so much from their highs already.
This may be frustrating to many, since these companies are generally performing very well. All three companies recently reported earnings, and displayed great numbers at the operating level. All three handily beat their revenue and earnings estimates, with CrowdStrike seeing 61% revenue growth, MongoDB seeing 56% growth, and HubSpot 41% growth -- all solid figures, especially during the tumultuous first quarter.
The problem? Since each company doesn't currently have GAAP net earnings, investors have become more skeptical over their valuations. Unfortunately, if rates and inflation stay high, high rates are a killer for growth stocks with the bulk of their earnings out in the future. Meanwhile, if the Federal Reserve hikes rates faster and causes an economic downturn, growth could slow. So, the bullish cocktail of low rates and high growth during the pandemic is reversing on both counts.
CRWD PS Ratio data by YCharts
Now what
There was once a time when a 10 times price-to-sales ratio would only be considered for the highest-quality growth stocks; as you can see, MongoDB and CrowdStrike still trade well above that, even after their sell-offs over the past six months, and HubSpot trades just a hair below 10 times sales.
The big question for these stocks may be long-term interest rates. The 10-year Treasury bond surged higher to 3.35% today as of this writing, a level not seen since 2011. This is also the highest long-term rates have been since these companies went public. Therefore, investors should be prepared for a new valuation regime for each.
I've personally sold a lot of my profitless growth stocks over the past six months, as it's really unclear where long-term rates and inflation will end up this year. Nevertheless, those with a very long-term horizon and large capital gains may want to hold, as these three names are still best-in-class and should thrive over the next decade.
Yet with their stocks pricing in lots of growth already, that path could be remain rocky until inflation gets under control. Basically, things could remain very bumpy this year, and investors should prepare for more possible downside in these highly valued growth stocks -- even if their businesses continue to perform well.
