What happened
Shares of enterprise software companies Cloudflare (NET 1.39%), UiPath (PATH 2.48%) and Asana (ASAN 0.42%) rocketed higher by double digits today, up 16.7%, 13.4%, and 24%, respectively, as of 1:33 p.m. ET.
Of course, they weren't alone. Just about every exciting high-growth stock that had been beaten down severely since November is rocketing much higher after a hugely volatile week. Today's move could be short-covering, investors chasing the bounce, or a combination of both. The question is, have we reached bottom?
So what
Each of these software companies has been growing strongly amid a massive secular change in how enterprises work. Cloudflare is a cybersecurity company that allows enterprises to secure workloads across the cloud, private cloud, on-premise data centers, and others. UiPath makes software that allows companies to automate a number of back-end business processes. Asana makes productivity software that enables cross-functional teams to work better within a large organization.
If you think about it, these companies make products ideal for today's environment. The cybersecurity threat from Russia, China, hacking organizations, and others is only growing, and organizations have increasingly diverse data center footprints, making Cloudflare's multi-format cybersecurity software ideal. Amid rising wages and labor shortages, enterprises that can automate more processes via UiPath software robots should have an advantage. The same goes for Asana, which enables company employees to do more with less.
Their growth rates have certainly confirmed the thesis. Cloudflare grew revenue 53.7% last quarter and raised revenue guidance for the year on its recent earnings report. UiPath grew revenue at a healthy 39.7% in the fourth quarter, and reports on June 1. And Asana saw its revenue rocket 63.7% higher in the fourth quarter, and reports its first-quarter earnings June 2.
NET PS Ratio data by YCharts
However, each of these companies is also losing money on the bottom line, and none are expected to make materials profits this year either. That's a problem in this environment of rising inflation and interest rates. As such, each stock is down by a ton as their price-to-sales ratios have utterly collapsed since November.
Image source: Getty Images.
Now what
All of these stocks are bouncing today since they have fallen so far. Cloudflare is down 75% from all-time highs, with UiPath down 84% and Asana down a whopping 87% -- and that's even after today's bounce.
With them down so much, investors may think they have finally hit bottom. Hence, the huge rally today.
I also can't help but mention that Asana's CEO Dustin A. Moskovitz has bought more than $1 billion in Asana stock between last June and February 2022 as the stock fell -- the largest insider buy in history! So, that could certainly encourage investors to buy at these levels, which are materially lower than the levels at which Moskovitz bought.
At the same time, it's still unclear where interest rates will go, and if more de-rating will occur in the software space. Investors are now wondering about the level of future profits in these software companies, and the time frame in which they might show up. It's still unclear when that will happen, even if revenue is growing nicely.
Moreover, Asana still trades at more than 11 times sales, even after its precipitous decline. There was once an era not too long ago when only the best software companies would be valued at 10 times earnings or more. So, while these companies may have bottomed, I don't think they will get back to those all-time highs anytime soon.
So believe it or not, these stocks could possibly still fall further. However, as today shows, they could also rocket higher. The further out in the future the cash flows in a growth company, the more these high-growth, long-duration assets will fluctuate in price with changes in interest rate expectations. Therefore, investors shouldn't really just blindly buy these stocks because they're down, but rather follow the companies and have confidence future cash flows will eventually come. While we should all hope inflation will decline materially, it's by no means guaranteed. Therefore, clarifying your view on future profitability will give you more confidence to hold growth stocks through another potential leg down.
