Growth darlings Shopify (SHOP -11.34%), Upstart Holdings (UPST -6.13%)and DraftKings (DKNG -10.80%) were each down big today, falling 11.9%, 6.9%, and 10.8%, respectively, as of 3:35 pm ET.
There wasn’t any material news out of these companies today; however, after growth stocks rallied yesterday, they fell by just as much today when May jobs numbers came in stronger than expected. Moreover, investors may have been spooked by You’re here CEO Elon Musk’s comment in a company email that he feels “super bad” about the economy right now.
It’s a pretty bad combination for these three stocks, which are each consumer-facing growth stocks. An inflationary environment would cap growth stock valuations, while a bad economy for consumer spending could also affect their top and bottom lines.
May jobs numbers were released today and they came in a bit hotter than expected, with 390,000 jobs added versus expectations of 325,000.
Isn’t a strong jobs number good? Well, yes and no. Currently, inflation is running too hot and there aren’t enough workers for all the demand. In May, the Federal Reserve hiked interest rates another 50 points in an effort to cool the economy, but May’s job numbers showed continued strong hiring.
For growth stocks, that could be a case of “good news is bad news.” Strong hiring could indicate that the Fed may raise interest rates at a stronger pace than anticipated, and higher rates would be detrimental to growth stocks, as higher long-term rates lower the intrinsic value of earnings far out in the future. If revenue and profit expectations don’t go up in tandem, share prices are likely to fall as they did today.
Meanwhile, each of these companies has been going through its own operational troubles recently. Shopify has seen a big deceleration in e-commerce purchases as the economy has reopened, and a recent shareholder proposal to grant CEO Tobi Lütke “founder’s shares” that would give him even more control over the company has come under scrutiny. Upstart recently sold off hard after it ran into problems selling its loans to third parties amid higher rates, and was forced to hold some of its loans on its balance sheet.
Meanwhile, DraftKings has been the target of short-sellers over the past six months. The change in sentiment for this previous highflier has been amplified as investors have focused on near-term profitability. That’s not good for DraftKings, which still sees an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss between $760 million and $840 million this year.
Furthermore, higher food and energy inflation due to geopolitical conflict could cause consumers to pull back on discretionary purchases, which would affect DraftKings and Shopify. Meanwhile, a difficult economy could mean more charge-offs for Upstart’s loans, which are already showing signs of increased delinquencies amid higher inflation. Investors had to deal with JPMorgan Chase CEO Jamie Dimon saying he sees a “hurricane” on the horizon earlier this week, and a leaked email today from Musk showed he wants to cut 10% of Tesla’s staff over near-term economic fears.
Aside from earnings numbers, one can expect high-growth stocks like these to be very sensitive to incoming economic and inflation data — and random comments from prominent CEOs as well. Yet with these stocks down so much already to start the year, has the hate gone too far?
That’s very hard to say, since none of these industry leaders looks “cheap” by conventional metrics, despite their lower share prices. Therefore, investors should have a well-informed view of each company’s competitive advantages and paths to future profitability. With investors now focused on value as financial conditions tighten, you should probably try to stay away from pricing these stocks on price-to-sales ratios, and perhaps try to construct a discounted cash flow model to get a better estimate of their true value. That will help you sift through this very noisy economic environment.