What happened
Shares of a broad swath of high-growth stocks stumbled this week as the market focused on a wide range of economic issues that had the major U.S. stock indexes decidedly lower.
Identify verification and access management specialist Okta (OKTA -4.10%) cratered by as much as 37.8%, cloud-native database provider MongoDB (MDB -1.39%) crashed as much as 32.6%, while cybersecurity specialist CrowdStrike's (CRWD -3.09%) stock slumped as much as 13.1%, according to data provided by S&P Global Market Intelligence. As of the close of the trading day on Thursday, the trio was still trading lower, down 35.2%, 31.8%, and 11.1%, respectively. The broader market indexes were also lower this week, with the S&P 500 down 2.2% since last Friday's close (as of this writing), while the Nasdaq Composite declined 2.9%.
Fears regarding the overall condition of the economy and the potential for further interest rate hikes weighed on major indexes this week, but it was data points from each company's financial results that were the primary drivers for the declines.
So what
After the market close on Wednesday, Okta reported second-quarter results that easily surpassed expectations. Revenue of $452 million jumped 43% year over year, though its remaining performance obligation (RPO), which provides insight into future sales trends, grew just 25%. This resulted in an adjusted loss per share of $0.10, as Okta cut its red ink by two-thirds compared to the year-ago quarter. Both sales and losses beat expectations, as analysts' consensus estimates called for revenue of $430.7 million and a non-GAAP (adjusted) loss per share of $0.31.
So what caused the wicked sell-off? In a word: Outlook. Okta called into question its long-term growth targets as the company wrestled with integrating Auth0, a company it recently acquired, but the transition wasn't going according to plan.
MongoDB also reported its second-quarter results after the market close on Wednesday, which were also better than expected. Revenue of $304 million climbed 53% year over year, while its adjusted loss per share of $0.23 nearly doubled. Those figures were still robust enough to sail past expectations, as analysts' consensus estimates were calling for revenue of $284.4 million and an adjusted loss per share of $0.28. Furthermore, MongoDB raised its full-year outlook in the wake of its strong performance.
Considering the company's "beat and raise," why did investors cut and run on MongoDB? The most likely catalyst was the company's mounting losses, which doubled compared to the year-ago quarter and spooked investors.
CrowdStrike had its turn at bat earlier this week, delivering second-quarter results that were, by all accounts, exemplary. Revenue of $535 million surged 58% year over year, while its adjusted earnings per share of $0.36 more than tripled. The results easily surpassed expectations, as analysts' consensus estimates called for revenue of $516 million and adjusted EPS of $0.28. Furthermore, even though it wasn't profitable on a generally accepted accounting principles (GAAP) basis, CrowdStrike reduced its red ink and generated strong free cash flow, which suggests its losses are the result of non-cash items, including depreciation, and ongoing profitability is only a matter of time.
So what caused the post-earnings decline? As my Motley Fool colleague Rich Smith pointed out, CrowdStrike has a pretty lofty valuation for a company that isn't yet profitable.
Now what
One of the key takeaways from this week's batch of earnings reports is that each company is unique, and investors can take a dim view of a stock whether it beats expectations and raises its outlook -- or not. Fair-weather investors can quickly become disillusioned with a lack of profits, the current state of an acquisition, or a lofty valuation.
This also helps to illustrate why taking a long-term view can be far less stressful and more rewarding. While it's hard to predict exactly what a stock will do over the course of days or weeks, a business that executes quarter in and quarter out will eventually get the recognition it deserves, almost always in the form of an increasing stock price.
Finally, to Rich's point, none of these stocks is cheap in terms of traditional valuation metrics, though given their recent stock price corrections, all three are much more reasonable than they have been. Each is trading at or near historically low valuations, which is certainly a step in the right direction.
Data by YCharts.
However, as our review of their recent financial results illustrates, there's a reason investors have been willing to pay top dollar for these companies. In the most recent quarter, Okta, MongoDB, and CrowdStrike grew revenue by 43%, 53%, and 58% year over year, respectively.
Growth at this level suggests these stocks may be deserving of a higher multiple. Given the strong underlying fundamentals and robust performances that gave way to these lofty valuations, there's certainly an argument that these high-growth stocks are worth every penny.
