For now, markets are as willing as ever to pay nosebleed multiples for high-growth tech stocks -- just as long as no bad news arrives that punctures the uber-bullish long-term growth narratives that have set investor imaginations alight.
But if something does manage to puncture such a narrative a little bit, then investors are often very quick to head for the exits.
Just ask Fastly (FSLY) . After dropping 27% a week ago in response to a Q3 sales warning blamed on multiple factors, Fastly's stock has dropped another 11%, putting it at levels first reached in June.
Slack (WORK) -- a company that I'm more positive on, in part due to the long-term potential of its Slack Connect platform -- is another good case in point. Following a Wednesday tumble caused by a Morgan Stanley downgrade, Slack is trading 26% below a June 2019 opening price of $38.50, and is 28% below a June high of $40.07.
One could also look at a company like machine data analytics software firm Sumo Logic (SUMO) , which is currently trading 25% below a Sep. 17 post-IPO opening price of $26.64 and sports forward sales and billings multiples well below those of many other high-growth enterprise software names.
Each of these companies are still recording pretty strong growth. Fastly's revised Q3 guidance still implies 40%-plus annual growth, and Slack and Sumo Logic are respectively forecast to see 29% and 25% billings growth during their next fiscal years (for both companies, they end in Jan. 2022).
But right now, it's a little tougher to create bull cases founded on expectations of many years of massive growth than it is for, say, a Zoom (ZM) , a Shopify (SHOP) or a Peloton (PTON) .
Following its warning, Fastly, whose rivals include Cloudflare (NET) , Akamai (AKAM) and public cloud giants, is facing more questions about its competitive standing. Slack has been dogged for a while by concerns about Microsoft Teams' growth, and the fact that Sumo Logic remains much smaller than Splunk (SPLK) in the machine data analytics space (and also competes to an extent against the likes of Datadog and Elastic) makes it tough to conjure up a runaway-growth narrative.
On the other hand, if a high-growth company doesn't share anything to puncture the narrative that has led its shares to receive sky-high multiples, investors are quite happy right now to keep the party going.
Snap (SNAP) , which soared on Wednesday after posting a strong Q3 beat (never mind the $70 million in quarterly cash burn), is a good example of this. To an extent, so is Tesla (TSLA) , which is fully holding onto its 400%-plus 2020 gains following its Q3 report.
All of this brings to mind BTIG security/analytics software analyst Gray Powell shared about what he's been hearing during talks with tech investors in recent weeks.
"[The] only two things investors really care about are (1) How fast the company is growing and (2) If there is upside to numbers," Powell wrote. "To this point, the main feedback we hear in discussions about our long-term growth outlook and [internal rate of return] work on the space is 'valuation is just a number.'"
In line with this commentary, Powell observed that the investors BTIG talked to were almost uniformly bullish on richly-valued, high-growth names such as Cloudflare, CrowdStrike, Okta and Snowflake, and more lukewarm about more moderately-priced (but still growing) companies such as Proofpoint and Ping Identity.
Just how long this state of affairs lasts isn't something that I'm going to try and guess. The possibility of greater COVID-related macro headwinds spoiling the fun this winter can't be ignored, but with more stimulus potentially on the way and many tech firms still sharing good earnings news, the party could last a while longer.
But those investing in a Tesla, Snap, Zoom or Snowflake at current levels should keep in mind how many retail and institutional investors got burned in both 2000 and 2008 by embracing the kind of runaway-growth narratives that have propelled these companies higher. As well as how growing tech companies that don't have such narratives to lean on are often trading at this very moment.
