Shares of enterprise software darlings Snowflake(NYSE: SNOW), Appian(NASDAQ: APPN), and Twilio(NYSE: TWLO) plunged on Friday, with the stocks down 8.1%, 8.2%, and 5.3%, respectively, as of 3:50 p.m. ET.
There wasn't any material news out of these companies, which have each reported earnings and attended industry conferences in recent weeks. Therefore, the synchronous declines likely have to do with macroeconomic factors, or perhaps ripples from other companies in the SaaS sector.
Over the past two days, there were releases of economic data that may be playing a part in the cloud software industry's declines. Yesterday, the Bureau of Labor Statistics released February inflation data that showed a whopping 7.9% year-over-year increase, which was even bigger than expected. With inflation high, some anticipate the Federal Reserve will aggressively hike interest rates, and higher interest rates tend to depress the value of future earnings.
Each of the above companies is a high-growth company currently generating losses, with anticipated profits well out into the future. So it's no surprise investors are continuing to chip away at their estimates of these stocks' intrinsic value as rates rise.
Additionally on Friday, the University of Michigan published its consumer sentiment report from earlier in March, showing the lowest reading since 2011. The 59.7 reading, down from 62.8 in February, was also lower than expected. Survey participants mentioned fears of the Russia-Ukraine conflict and the ensuing effect on inflation as reason for the lower-than-expected reading.
Consumer sentiment is often viewed as a preview of consumer spending, which drives much of the U.S. economy. If growth slows, that could also affect the willingness of businesses to spend on IT services and new software. That's a deadly combination when paired with high interest rates.
Finally, last night's earnings out of DocuSign(NASDAQ: DOCU) may have also spooked investors. While DocuSign beat revenue expectations last quarter, full-year guidance came in far lower than expected. DocuSign, like the three aforementioned stocks, was perceived to be a "COVID winner." There are now fears that the company merely pulled forward years of sales over the course of the past two years, and that its revenue growth trajectory will be lower going forward. DocuSign is off more than 20% today, so perhaps Snowflake, Appian, and Twilio are down in sympathy with DocuSign's guidance was well.
It has been a difficult year for high-growth digital technology stocks that saw rapid adoption during the pandemic as the pandemic trade unwinds. These stocks are now facing the dual threat of decelerating (although still strong) revenue growth, along with higher interest rates.
At some point, these stocks will bottom, and may make for good investments for investors with a long time horizon. However, it's not clear when that time will be. Likely, these companies will need a combination of revenue beats in upcoming earnings reports, along with overall inflation figures coming down. Until that happens, it's hard to feel confident that they have bottomed, even though Snowflake is down 52%, Twilio is down 78%, and Appian is down 68% from all-time highs.
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Billy Duberstein has the following options: short January 2023 $100 puts on Snowflake Inc. His clients may own shares of the companies mentioned. The Motley Fool owns and recommends Appian, DocuSign, Snowflake Inc., and Twilio. The Motley Fool has a disclosure policy.