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Why Snowflake, MongoDB, and Datadog Crashed Today

What happened

Shares of cloud software disruptors Snowflake (NYSE: SNOW), MongoDB (NASDAQ: MDB), and Datadog (NASDAQ: DDOG) fell hard today, down 7.7%, 6.6%, and 6.2%, respectively, as of 3:02 p.m. ET.

None of these companies had any material news today; however, the combination of a higher-than-expected inflation report and weak earnings out of software peer DocuSign (NASDAQ: DOCU) was enough to send these growth leaders tumbling.

So what

The Bureau of Labor Statistics released May inflation data this morning, which came in hotter than expected. Headline inflation was 8.6%, versus 8.3% expected, and even “core” inflation, which strips out volatile food and energy prices, came in at 6%, versus 5.9% expected.

With inflation already running at high levels, the surprise likely led many investors to immediately price in more interest rate hikes from the Federal Reserve this year. The 10-year Treasury bond rose sharply to 3.17% at one point, before retreating to 3.15% as of this writing. The higher long-term bond yields are, the higher the discount rate investors may apply to stocks. Since Snowflake and MongoDB are still printing significant operating losses under generally accepted accounting principles (GAAP), and Datadog is around breakeven, the bulk of the value in each of these stocks lies far in the future. But the higher long-term interest rates are and the further out the earnings are, the less those future profits are worth.

Additionally, bad billings guidance from DocuSign on its first-quarter earnings release last night cast a doubly sour mood over the cloud software space. Although DocuSign’s revenue beat expectations for the current quarter, up 25%, management expects only 6% to 7% billings growth this year.

Billings growth is perhaps more important than revenue in many cases for software companies. That’s because billings incorporate the change in revenue as well as the change in deferred revenue from upfront subscriptions. While headline revenue includes monthly revenue from subscriptions that were signed well in the past, billings capture all of the new growth in the quarter.

DocuSign saw a huge uptake during the pandemic, when businesses large and small were forced to go digital in a short amount of time; now that the pandemic is receding, there seems to be an “air pocket” in its growth. The sector-wide sell-off in the software-as-a-service (SaaS) sector seems to indicate investors are nervous DocuSign’s billings slowdown will hit these top names as well.

In fact, while these three names all recently delivered fairly solid earnings, they also already guided for a deceleration this year, albeit off a much higher growth rate. Snowflake recently reported product revenue growth of 84%, but guided for 66% full-year growth at the midpoint. MongoDB recently reported 57% growth, but its full-year guidance projected a little more than 35% growth. Datadog just printed an impressive 84% revenue growth rate in the recent quarter, but guided for 56% revenue growth for the full year.

These are much stronger growth numbers than DocuSign’s, but these three stocks also trade at much higher price-to-sales ratios:

SNOW PS Ratio data by YCharts

Now what

Given that these three stocks are disruptors in their fields and sporting really terrific growth rates, and given that they are down so much from their highs, one might think they’re a bargain right now.

However, I would caution investors against this notion. These companies each came public in recent years, when interest rates were at or near zero. Furthermore, each absolutely took off during the pandemic, as the push for enterprise-wide digitization soared. While these companies might not see a deterioration in growth as bad as DocuSign, they will likely show deceleration, if anything because it’s harder to grow at sky-high rates the bigger you get.

Meanwhile, there’s no way to know how high interest rates will go. As today’s price action showed, these stocks could either rocket higher if interest rates show signs of peaking and come back down, or they could fall further if long-term interest rates continue to climb higher. If you’re holding these stocks, be prepared for volatility, and make sure you have a reasonable idea of intrinsic value, based on estimated future profits and a reasonable discount rate, as a goalpost.

Billy Duberstein has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog, DocuSign, MongoDB, and Snowflake Inc. The Motley Fool recommends the following options: long January 2024 $60 calls on DocuSign. The Motley Fool has a disclosure policy.

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