What happened

Cloud software stocks were among the victims of today's sell-off. A weak report by chipmaker Micron and stronger-than-expected economic data had investors simultaneously anticipating a slowdown in the tech sector and extended rate hikes from the Fed into next year to cool off the economy.

Twilio (TWLO -1.88%), HubSpot (HUBS 0.76%), and C3.ai (AI 0.46%) were all losers on the news. The three tech stocks have struggled and could use some help from the macroeconomic environment to turn around their performance.

Twilio stock closed down 4.1%, while HubSpot lost 3.9% and C3.ai fell 6.4%. Meanwhile, the Nasdaq finished the day down 2.2%.

So what

The final estimate of third-quarter gross domestic product (GDP) growth came in at 3.2% this morning, ahead of estimates of 2.9%. The report showed that economic growth remained solid in the third quarter, even as the Federal Reserve aggressively hiked interest rates. The strong GDP reading makes it more likely that the Fed will continue to hike interest rates next year.

Weekly initial unemployment claims also remained low, showing that the labor market continues to be tight. This is further evidence that the Fed could continue to tighten monetary policy.

Separately, Micron, the country's largest maker of memory chips, issued a disappointing earnings report, which included a wider-than-expected loss in the current quarter. The company said it was reducing its workforce by 10% to cut costs in a challenging environment.

Micron is seen as a bellwether for the semiconductor sector and tech demand, more broadly. The company forecast both a double-digit decline in shipments and prices, indicating that demand for PCs and other devices will remain challenged and casting doubts on the health of the broader business environment. 

Struggling cloud stocks, like the group above, reacted negatively to both news items. They've proven to be sensitive to macroeconomic demand and interest rates.

Shares of Twilio, the company that provides cloud-based communication software, have fallen 83% this year, as growth has slowed. The company stepped back from its long-term guidance of growing revenue by at least 30% annually through 2024.

Twilio also had its own round of layoffs in September, cutting ties with 11% of its workforce as the company doubled down on its goal of turning profitable in 2023. As interest rates have risen this year, pressure has built on cloud stocks to report a profit, and Twilio now seems to be responding to these demands.

Customer relationship-management (CRM) platform HubSpot has also struggled this year, as growth has slowed following a boom during the pandemic. The stock is down 57% year to date.

In the company's most recent quarter, revenue was up a solid 31% to $444 million. HubSpot was profitable on a non-GAAP basis, though it continues to report a loss on a GAAP basis. However, management's guidance called for revenue growth to decelerate to near 20% in the fourth quarter. It also said it was experiencing longer sales cycles with customers amid a weakening macro environment.

As a CRM platform, HubSpot is more cyclical than other cloud tools that companies need, regardless of business expansion.

Finally, C3.ai stock has collapsed since its initial public offering (IPO) two years ago, and the stock is down 65% year to date. The company recently shifted its business model from subscription-based to consumption-based, which it believes better aligns with customer needs for its artificial intelligence (AI)-based software-as-a-service (SaaS) platform.

As a result of that transition, revenue growth has slowed significantly, coming in at just 7% to $62.4 million. Subscription revenue growth was up 26%, showing solid customer growth, even as the company's professional services temporarily declined. This explains the slower growth in overall revenue. 

C3.ai is still a small company and has fewer than 250 customers. Since its cloud platform is based on more experimental technology than others, the company may need the economy to improve for businesses to feel more comfortable spending on its product.

Now what

Today's sell-off should be a reminder that the woes in the cloud sector are likely to continue into 2023, at least until interest rates stabilize and investors have more confidence in the economy. Based on Micron's update and commentary from software companies about the macro environment, it seems like the situation could get worse before it gets better.