CNBC’s Jim Cramer on Friday told investors what to pay attention to next week on Wall Street, highlighting the nonfarm payroll report and earnings from GitlLab and CrowdStrike.
“To those of you who want the Fed to cut so badly that you’re staying on the sidelines until they do,” he said, “you’d better hope we get some weakness in the employment numbers next Friday.”
GitLab will report on Monday. Cramer said he’s waiting to see how the company will perform because some in the enterprise software sector see issues with sales. He noted that GitLab’s last quarter was disappointing. It seemed to him as a one-off situation at the time, but maybe the report was a precursor of trouble to come in the industry, he said.
Tuesday brings quarterly results from CrowdStrike, and Cramer said the cybersecurity company has been doing better than many of its peers.
Hewlett Packard Enterprise, Ferguson and PVH also report Tuesday. Cramer will be waiting to see how HPE stacks up against competitors like Dell. According to Cramer, Ferguson is a great way to invest in infrastructure. He’ll also be watching PVH, known from brands like Calvin Klein and Tommy Hilfiger, but said he prefers Ralph Lauren in the apparel space.
Dollar Tree, Campbell Soup, Jack Daniels maker Brown-Forman and Lululemon will report on Wednesday. Cramer said he wonders if Brown-Forman will be able to explain what’s hurting liquor sales, as well as whether a difficult and crowded market for athleisure is already “baked into” Lululemon’s stock.
On Thursday, JM Smucker and DocuSign are due to report. Cramer said JM Smucker needs to find something to make the company grow faster, and he wondered how DocuSign will figure out how to turn its business around.
Friday brings perhaps the most important event of the week, according to Cramer, the Labor Department’s nonfarm payroll report for the month of May. He stressed the Federal Reserve won’t be inclined to cut rates until the unemployment rate reaches 4%. In April, the jobless rate inched up to 3.9% from 3.8% the previous month.
Cloud stocks are slipping on Tuesday, after one of the more prominent ones, Datadog, lowered its full-year revenue guidance as organizations remain engaged in cost-saving exercises.
One cloud-oriented exchange-traded fund, the WisdomTree Cloud Computing Fund, tumbled 3% for the day, on pace for its fifth day of declines in the past six trading sessions.
Many cloud-computing companies enjoyed higher demand after Covid prompted companies, governments and schools to switch on more cloud services as employees worked from home. Then inflation hit, central bankers raised interest rates, and investors began selling holdings in fast-growing cloud stocks and rotating into safer investments that could more consistently offer returns.
Plus, some parts of the economy, such as real estate, have started to flag because of higher rates, leading management teams to look for places to save money on cloud infrastructure and other technology.
Executives at many cloud companies responded by reducing overhead, sometimes in the form of layoffs. In the past several months, the rise of generative artificial intelligence services such as startup OpenAI’s ChatGPT chatbot have made investors more interested in adopting similar technologies and additional tools to help with the shift. Cloud stocks began to rebound, but many, including Datadog, have yet to trade above their record highs from 2021.
Now some of the fastest-growing companies are no longer looking so hot.
Datadog’s revenue grew almost 83% year over year in the first quarter of 2022. Early on Tuesday Datadog said it expects full-year revenue to come in between $2.05 billion and $2.06 billion, down from the range of $2.08 billion to $2.10 billion that it provided in May. That implies Datadog sees fourth-quarter revenue growing just 15%, compared with a forecast of almost 23% before. Analysts polled by Refinitiv had expected $2.081 billion in revenue for the full year.
“We saw usage growth for existing customers that was a bit lower than it had been in previous quarters,” Olivier Pomel, Datadog’s cofounder and CEO, said on a conference call with analysts. “We continue to see customers larger spending customers scrutinize costs.”
Datadog’s guidance of $521 million to $525 million in revenue for the third quarter underwhelmed analysts. They had expected $533 million, according to Refinitiv. Then again, Pomel said during the call that he and his colleagues have incorporated conservatism into their outlook.
“For a company where growth has been one aspect making it so attractive, it is probably not surprising that the stock is down sharply in the pre-market,” Bernstein Research analysts led by Peter Weed, with the equivalent of a buy rating on Datadog stock, wrote in a note distributed to clients. They haven’t soured on the stock altogether, though. They analysts wrote that they expect growth to return as enterprise spending budgets recover and venture capitalists start pouring large pools of money into startups again.
Datadog shares, which debuted on the Nasdaq in 2019, were on track for their sharpest single-day pullback since March 2020, as Covid emerged in the U.S. They were down as much as 21% on Tuesday.
Most stocks in WisdomTree’s cloud fund were down on Tuesday. But it wasn’t all Datadog’s fault.
Late on Monday cloud communications software maker RingCentral said Hewlett Packard Enterprise’s finance chief, Tarek Robbiati, will replace co-founder Vlad Shmunis as CEO later this month. Shares of RingCentral were down as much as 18%.
“Sales cycles remain elevated versus last year, and customer buying decisions continue to go through additional layers of approval,” RingCentral’s chief financial officer, Sonalee Parekh, said on a conference call with analysts. “We are also seeing less upsell within our existing base as customers have slowed hiring and rationalized their employee counts.”
Like Datadog, Everbridge, whose software helps companies respond to emergencies, lowered its growth expectations for the full year on Tuesday. It now sees a larger loss than it had called for three months ago.
A weaker economy has led to “slower sales of large deals,” finance chief Patrick Brickley said on a conference call with analysts. Shares had slid almost 24% when the stock hit a session low of $22.17 per share.
Following a record-smashing tech IPO year in 2021 that featured the debuts of electric car maker Rivian, restaurant software company Toast, cloud software vendors GitLab and HashiCorp and stock-trading app Robinhood, 2022 has been a complete dud.
The only notable tech offering in the U.S. this year was Intel’s spinoff of Mobileye, a 23-year-old company that makes technology for self-driving cars and was publicly traded until its acquisition in 2017. Mobileye raised just under $1 billion, and no other U.S. tech IPO pulled in even $100 million, according to FactSet.
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In 2021, by contrast, there were at least 10 tech IPOs in the U.S. that raised $1 billion or more, and that doesn’t account for the direct listings of Roblox, Coinbase and Squarespace, which were so well-capitalized they didn’t need to bring in outside cash.
The narrative completely flipped when the calendar turned, with investors bailing on risk and the promise of future growth, in favor of profitable businesses with balance sheets deemed strong enough to weather an economic downturn and sustained higher interest rates. Pre-IPO companies altered their plans after seeing their public market peers plunge by 50%, 60%, and in some cases, more than 90% from last year’s highs.
In total, IPO deal proceeds plummeted 94% in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young’s IPO report published in mid-December. As of the report’s publication date, the fourth quarter was on pace to be the weakest of the year.
With the Nasdaq Composite headed for its steepest annual slump since 2008 and its first back-to-back years underperforming the S&P 500 since 2006-2007, tech investors are looking for signs of a bottom.
But David Trainer, CEO of stock research firm New Constructs, says investors first need to get a grip on reality and get back to valuing emerging tech companies based on fundamentals and not far-out promises.
As tech IPOs were flying in 2020 and 2021, Trainer was waving the warning flag, putting out detailed reports on software, e-commerce and tech-adjacent companies that were taking their sky-high private market valuations to the public markets. Trainer’s calls appeared comically bearish when the market was soaring, but many of his picks look prescient today, with Robinhood, Rivian and Sweetgreen each down at least 85% from their highs last year.
“Until we see a persistent return to intelligent capital allocation as the primary driver of investment decisions, I think the IPO market will struggle,” Trainer said in an email. “Once investors focus on fundamentals again, I think the markets can get back to doing what they are supposed to do: support intelligent allocation of capital.”
Lynn Martin, president of the New York Stock Exchange, told CNBC’s “Squawk on the Street” last week that she’s “optimistic about 2023” because the “backlog has never been stronger,” and that activity will pick up once volatility in the market starts to dissipate.
For companies in the pipeline, the problem isn’t as simple as overcoming a bear market and volatility. They also have to acknowledge that the valuations they achieved from private investors don’t reflect the change in public market sentiment.
Companies that were funded over the past few years did so at the tail end of an extended bull run, during which interest rates were at historic lows and tech was driving major changes in the economy. Facebook’smega IPO in 2012 and the millionaires minted by the likes of Uber, Airbnb, Twilio and Snowflake recycled money back into the tech ecosystem.
Venture capital firms, meanwhile, raised ever larger funds, competing with a new crop of hedge funds and private equity firms that were pumping so much money into tech that many companies were opting to stay private for longer than they otherwise would.
Money was plentiful. Financial discipline was not.
In 2021, VC firms raised $131 billion, topping $100 billion for the first time and marking a second straight year over $80 billion, according to the National Venture Capital Association. The average post-money valuation for VC deals across all stages rose to $360 million in 2021 from about $200 million the prior year, the NVCA said.
Those valuations are in the rearview mirror, and any companies who raised during that period will have to face up to reality before they go public.
Some high-valued late-stage startups have already taken their lumps, though they may not be dramatic enough.
Stripe cut its internal valuation by 28% in July, from $95 billion to $74 billion, the Wall Street Journal reported, citing people familiar with the matter. Checkout.com slashed its valuation this month to $11 billion from $40 billion, according to the Financial Times. Instacart has taken a hit three times, reducing its valuation from $39 billion to $24 billion in May, then to $15 billion in July, and finally to $13 billion in October, according to The Information.
Klarna, a provider of buy now, pay later technology, suffered perhaps the steepest drop in value among big-name startups. The Stockholm-based company raised financing at a $6.7 billion valuation this year, an 85% discount to its prior valuation of $46 billion.
“There was a hangover from all the binge drinking in 2021,” said Don Butler, managing director at Thomvest Ventures.
Butler doesn’t expect the IPO market to get appreciably better in 2023. Ongoing rate hikes by the Federal Reserve are looking more likely to tip the economy into recession, and there are no signs yet that investors are excited to take on risk.
“What I’m seeing is that companies are looking at weakening b-to-b demand and consumer demand,” Butler said. “That’s going to make for a difficult ’23 as well.”
Butler also thinks that Silicon Valley has to adapt to a shift away from the growth-first mindset before the IPO market picks up again. That not only means getting more efficient with capital, showing a near-term path to profitability, and reining in hiring expectations, but also requires making structural changes to the way organizations run.
For example, startups have poured money into human resources in recent years to handle the influx in people and the aggressive recruiting across the industry. There’s far less need for those jobs during a hiring freeze, and in a market that’s seen 150,000 job cuts in 2022, according to tracking website Layoffs.fyi.
Butler said he expects this “cultural reset” to take a couple more quarters and said, “that makes me remain pessimistic on the IPO market.”
One high-priced private company that has maintained its valuation is Databricks, whose software helps customers store and clean up data so employees can analyze and use it.
Databricks raised $1.6 billion at a $38 billion valuation in August of 2021, near the market’s peak. As of mid-2021, the company was on pace to generate $1 billion in annual revenue, growing 75% year over year. It was on everybody’s list for top IPO candidates coming into the year.
Databricks CEO Ali Ghodsi isn’t talking about an IPO now, but at least he’s not expressing concerns about his company’s capital position. In fact, he says being private today plays to his advantage.
“If you’re public, the only thing that matters is cash flow right now and what are you doing every day to increase your cash flow,” Ghodsi told CNBC. “I think it’s short-sighted, but I understand that’s what markets demand right now. We’re not public, so we don’t have to live by that.”
Ghodsi said Databricks has “a lot of cash,” and even in a “sky is falling” scenario like the dot-com crash of 2000, the company “would be fully financed in a very healthy way without having to raise any money.”
Snowflake shares in 2022
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Databricks has avoided layoffs and Ghodsi said the company plans to continue to hire to take advantage of readily available talent.
“We’re in a unique position, because we’re extremely well-capitalized and we’re private,” Ghodsi said. “We’re going to take an asymmetric strategy with respect to investments.”
That approach may make Databricks an attractive IPO candidate at some point in the future, but the valuation question remains a lingering concern.
Snowflake, the closest public market comparison to Databricks, has lost almost two-thirds of its value since peaking in November 2021. Snowflake’s IPO in 2020 was the largest ever in the U.S. for a software company, raising almost $3.9 billion.
Snowflake’s growth has remained robust. Revenue in the latest quarter soared 67%, beating estimates. Adjusted profit was also better than expectations, and the company said it generated $65 million in free cash flow in the quarter.
Still, the stock is down almost 20% in the fourth quarter.
“The sentiment in the market is a little stressed out,” Snowflake CEO Frank Slootman told CNBC’s Jim Cramer after the earnings report on Nov. 30. “People react very strongly. That’s understood, but we live in the real world, and we just go one day at a time, one quarter at a time.”
Cloud stocks plummeted 11% this week, the steepest drop since January, as executive departures at Five9 and Zscaler and investors’ continued rotation out of risk combined to send the group to its lowest level since March 2020.
The WisdomTree Cloud Computing Fund, a basket of 75 cloud software stocks, has lost 53% of its value for the year, more than double the drop in the S&P 500. After soaring in 2020 and 2021, when Wall Street piled into growth at the expense of profit, the sector has fallen out of favor in 2022 on concerns over inflation and rising interest rates.
Five9 shares suffered the biggest decline in the index, falling 29% for the week, after CEO Rowan Trollope said he was leaving to run a pre-IPO company. While the provider of call center software also pre-announced third-quarter revenue that indicated results would be better than expected, the numbers weren’t good enough to offset the concern caused by a transition in the C-suite.
Trollope, who’s been CEO since 2018, is being succeeded by Mike Burkland, who resigned as CEO in 2017 after he was diagnosed with cancer.
“Interest level in the name remains high, but confidence is shaken following both announcements and the lack of clarification from Five9 until the earnings call next month,” wrote analysts from Piper Sandler in a report on Oct. 13. The firm still has a buy rating on the stock.
Five9 wasn’t the only company in the group to lose a top executive. Security software vendor Zscaler announced the resignation of its president, Amit Sinha, who is also taking a CEO position at a pre-IPO company. The stock plunged 21% for the week.
“While it’s never (or rarely) thought of as good news for a C-level executive to leave a company, we believe this change will not impact Zscaler’s near- or long-term prospects, and it appears to be a unique opportunity for Mr. Sinha,” wrote analysts from Guggenheim who recommend buying the stock.
It was a choppy week for the markets broadly, capped off by a selloff on Friday. A consumer survey from the University of Michigan showed inflation expectations were increasing, a sentiment that the Federal Reserve is likely watching closely. The Nasdaq led declines as growth companies are most sensitive to interest rate hikes.
The WisdomTree index fell all five days this week, and had its worst day on Friday, dropping 3.6%. SentinelOne, which sells cybersecurity software, dropped 22%, even with no particular news driving the decline. GitLab, a code repository for developers, slid 21%. SentinelOne and GitLab both went public last year in high-profile IPOs. They’ve each lost more than half their value this year.
