What happened
Shares of Palantir Technologies (PLTR -2.28%), Twilio (TWLO -2.96%), and Datadog (DDOG 0.80%) were initially higher in morning trading after yesterday’s brutal sell-off, but then fell again into the red throughout the day. Palantir was up as much as 3.4% before finishing the day down 2.4%, Twilio rocketed 6.4% higher before finishing the day down 3%, and Datadog rose 7.2% in morning trading before finishing the day just above breakeven.
All three companies have been volatile over the past few weeks, especially since each reported first-quarter earnings in recent days. Although each company beat estimates for revenue growth, with inflation and interest rates rising, investors are much more concerned about profits today — and not adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), but rather real profits and cash flow, even when factoring in stock-based compensation.
With the Bureau of Labor and Statistics releasing the consumer price index (CPI) tomorrow, nervous investors are likely positioning ahead of new inflation news.
So what
The market has been highly volatile lately, which is more or less due to inflation and fears over how high the Federal Reserve might raise interest rates. The monthly CPI comes out tomorrow, and the producer price index (PPI) comes out on Thursday. Even though these stocks have already been severely beaten down, they are still highly valued on today’s earnings and sales, and are therefore extraordinarily sensitive to interest rates. Hence their volatility today.
The move in Palantir was especially noteworthy. The stock plummeted yesterday by more than 20% following its Monday morning earnings report. While the company beat analyst expectations for revenue, which grew 31%, it missed on the bottom line. The company also gave the dreaded weak guidance, with a forecast of $470 million in revenue for the current quarter relative to analyst expectations of $485 million. Additionally, Palantir disclosed it had stopped investing in other companies through special purpose acquisition companies (SPACS), into which it had invested hundreds of millions of dollars. In its release, Palantir recorded $51.9 million in losses, likely from the carnage in SPACS and other early stage company valuations.
While Palantir reports “adjusted” profits, it still lost over $100 million under generally accepted accounting principles (GAAP) last quarter, thanks to a massive $149 million in stock-based compensation.
As a result, two different analysts downgraded the stock today. Analysts at Royal Bank of Canada lowered their price target on Palantir from $12 to $6, and analysts at Citigroup lowered their price target from $10 to $7.
Twilio is another offender when it comes to massive stock-based compensation. The company reported last Wednesday, and while revenue growth was strong at 48%, the company still lost a staggering $222 million on a GAAP basis just last quarter alone. Like so many other tech companies, Twilio reports adjusted profits that neglect the absolutely massive stock compensation it pays its employees.
Finally, Datadog, which makes software to help enterprises manage their software applications and IT infrastructure, reported stellar revenue growth of 83% last week, and raised its outlook for the year. Datadog even eked out a $9.7 million GAAP profit in the quarter, swinging positively from a loss last year.
However, the company usually beats and raises, and did so by a lesser amount than it had in the past. The result? A sell-off. That’s also because Datadog trades at a ridiculously high 33 times sales — and this is after the stock has already been cut in half from its highs.
Now what
If inflation calms down and the economy is headed back to a low-rate environment, these high-growth software stocks could soar again. However, given their uncertain future profitability and still-high valuation relative to past decades for growth stocks, they could even fall further from here.
Investors should probably buckle up for more big moves either way, and make sure they really have conviction in these names if they’re going to hold them through this difficult period.
