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.
Car-sharing service Turo filed its IPO prospectus in January 2022. A month earlier, Reddit said it submitted a draft registration for a public offering. Instacart’s confidential paperwork was filed in May of last year.
None of them have hit the market yet.
Despite a bloated pipeline of companies waiting to go public and a rebound in tech stocks that pushed the Nasdaq up 30% in the first half of 2023, the IPO drought continues. There hasn’t been a notable venture-backed tech initial public offering in the U.S. since December 2021, when software vendor HashiCorp debuted on the Nasdaq.
Across all industries, only 10 companies raised $100 million or more in U.S. initial share sales in the first six months of the year, according to FactSet. During the same stretch in 2021, there were 517 such transactions, highlighted by billion-dollar-plus IPOs from companies including dating site Bumble, online lender Affirm, and software developers UiPath and SentinelOne.
As the second half of 2023 gets underway, investors and bankers aren’t expecting much champagne popping for the rest of the year.
Many once high-flying companies are still hanging onto their old valuations, failing to reconcile with a new reality after a brutal 2022. Additionally, muted economic growth has led businesses and consumers to cut costs and delay software purchases, which is making it particularly difficult for companies to comfortably forecast the next couple of quarters. Wall Street likes predictability.
So if you’re waiting on a splashy debut from design software maker Canva, ticket site StubHub or data management company Databricks, be patient.
“There’s a disconnect between valuations in 2021 and valuations today, and that’s a hard pill to swallow,” said Lise Buyer, founder of IPO consultancy Class V Group in Portola Valley, California. “There will be incremental activity after a period of absolute radio silence but it isn’t like companies are racing to get out the door.”
The public markets tell an uneven story. This year’s rally has brought the Nasdaq to within 15% of its record from late 2021, while an index of cloud stocks is still off by roughly 50%.
Some signs of optimism popped up this month as Mediterranean restaurant chain Cava went public on the New York Stock Exchange. The stock more than doubled on its first day of trading, indicating high demand from retail investors. Buyer noted that institutions were also enthused about the deal.
Last Friday, Israeli beauty and tech company Oddity, which runs the Il Makiage and Spoiled Child brands, filed to go public on the Nasdaq.
That all comes after a big month for secondary offerings. According to data from Goldman Sachs, May was the busiest month for public stock sales since November 2021, driven by a jump in follow-on deals.
While investors are craving new names, they’re much more discerning when it comes to technology than they were at the tail end of the decade-long bull market.
Mega-cap stocks Apple and Nvidia have seen outsized gains this year and are back to trading near all-time highs, boosting the Nasdaq because of their hefty weightings in the index. But the advances are not evenly spread across the industry.
In particular, investors who bet on less mature businesses are still hurting. The companies that held the seven-biggest tech IPOs in the U.S. in 2021 have lost at least 40% of their value since their debut. Coinbase, which went public through a direct listing, is down more than 80%.
That year’s IPO class featured high-growth businesses with even higher cash burn, an equation that worked fine until recession concerns and rising interest rates pushed investors into assets better positioned to withstand an economic slowdown and increased capital costs.
Employees of Coinbase Global Inc, the biggest U.S. cryptocurrency exchange, watch as their listing is displayed on the Nasdaq MarketSite jumbotron at Times Square in New York, April 14, 2021.
Shannon Stapleton | Reuters
Bankers and investors tell CNBC that optimism is picking up, but ongoing economic concerns and the valuation overhang from the pre-2022 era set the stage for a quiet second half for tech IPOs.
One added challenge is that fixed income alternatives are back. Following a lengthy stretch of near-zero interest rates, the Federal Reserve this year lifted its target rate to between 5% and 5.25%. Parking money in short-term Treasurys, certificates of deposit and high-yield savings offerings can now generate annual returns of 5% or more.
“Interest rates are not only about the cost of financing, but also getting investors to trade out of 5% risk-free returns,” said Jake Dollarhide, CEO of Longbow Asset Management. “You can make 15%-20% in the stock market but lose 15%-20%.”
Dollarhide, whose firm has invested in milestone tech offerings like Google and Facebook, says IPOs are important. They offer more opportunities for money managers, and they generate profits for the tech ecosystem that help fund the next generation of innovative companies.
But he understands why there’s skepticism about the window reopening. Perhaps the biggest recent bust in tech investing followed the boom in special purpose acquisition companies (SPACs), which brought scores of less mature companies to the public market through reverse mergers.
“It seems the foul odor of failure from the 2021 SPAC craze has spoiled the appetite from investors seeking IPOs,” Dollarhide said. “I think that’s done some harm to the traditional IPO market.”
Private markets have felt the impact. Venture funding slowed dramatically last year from record levels and has stayed relatively suppressed, outside of the red-hot area of artificial intelligence. Companies have been forced to cut staff and close offices in order to preserve cash and right-size their business
Pre-IPO companies like Stripe, Canva and Klarna have taken huge hits to their valuations, either through internal measures or markdowns from outside investors.
Few have been hit as hard as Instacart, which has repeatedly slashed its valuation, from a peak of $39 billion to as low as $10 billion in late 2022. Last year, the company confidentially registered for an IPO, but still hasn’t filed publicly and doesn’t have immediate plans to do so.
Similarly, Reddit said in December 2021 that it had confidentially submitted a draft registration statement to go public. That was before the online ad market took a dive, with Facebook suffering through three straight quarters of declining revenue and Google’s ad sales also slipping.
Now Reddit is in the midst of a business model shift, moving its focus beyond ads and toward generating revenue from third-party developers for the use of its data. But that change sparked a protest this month across a wide swath of Reddit’s most popular communities, leaving the company with plenty to sort through before it can sell itself to the public.
A Reddit spokesperson declined to comment.
Turo was so close to an IPO that it went beyond a confidential filing and published its full S-1 registration statement in January 2022. When stocks sold off, the offering was indefinitely delayed. To avoid withdrawing its filing, the company has to continue updating its quarterly results.
Like Instacart, Turo operates in the sharing economy, a dark spot for investors last year. Airbnb, Uber and DoorDash have all bounced back in 2023, but they’ve also instituted significant job cuts. Turo has gone in the opposite direction, more than doubling its full-time head count to 868 at the end of March from 429 at the time of its original IPO filing in 2021, according to its latest filing. The company reportedly laid off about 30% of its staff in 2020, during the Covid pandemic.
Turo and Instacart could still go public by year-end if market conditions continue to improve, according to sources familiar with the companies who asked not to be named because they weren’t authorized to speak publicly on the matter.
Byron Deeter, a cloud software investor at Bessemer Venture Partners, doesn’t expect any notable activity this year, and says the next crop of companies to debut will most likely wait until after showing their first-quarter results in 2024.
“The companies that were on file or were considering going out a little over a year ago, they’ve pulled, stopped updating, and overwhelmingly have no plans to refile this calendar year,” said Deeter, whose investments include Twilio and HashiCorp. “We’re 10 months from the real activity picking up,” Deeter said, adding that uncertainty around next year’s presidential election could lead to further delays.
In the absence of IPOs, startups have to consider the fate of their employees, many of whom have a large amount of their net worth tied up in their company’s equity, and have been waiting years for a chance to sell some of it.
Stripe addressed the issue in March, announcing that investors would buy $6.5 billion worth of employee shares. The move lowered the payment company’s valuation to about $50 billion from a high of $95 billion. Deeter said many late-stage companies are looking at similar transactions, which typically involve allowing employees to sell around 20% of their vested stock.
He said his inbox fills up daily with brokers trying to “schlep little blocks of shares” from employees at late-stage startups.
“The Stripe problem is real and the general liquidity problem is real,” Deeter said. “Employees are agitating for some path to liquidity. With the public market still pretty closed, they’re asking for alternatives.”
G Squared is one of the venture firms active in buying up employee equity. Larry Aschebrook, the firm’s founder, said about 60% of G Squared’s capital goes to secondary purchases, helping companies provide some level of liquidity to staffers.
Aschebrook said in an interview that transactions started to pick up in the second quarter of last year and continued to increase to the point where “now it’s overwhelming.” Companies and their employees have gotten more realistic about the market reset, so significant chunks of equity can now be purchased for 50% to 70% below valuations from 2021 financing rounds, he said.
Because of nondisclosure agreements, Aschebrook said he couldn’t name any private company shares he’s purchased of late, but he said his firm previously bought pre-IPO secondary stock in Pinterest, Coursera, Spotify and Airbnb.
“Right now there’s a significant need for that release of pressure,” Aschebrook said. “We’re assisting companies with elongating their private lifecycle and solving problems presented by staying private longer.”
Tech stocks still haven’t fully rebounded from a miserable 2022, but they’re rewarding investors who saw the sell-off as too extreme.
The Nasdaq Composite gained 2% this week, wrapping up the sixth-straight weekly rally for the tech-heavy index. It’s the longest stretch since January 2020, before the Covid-19 pandemic hit the U.S.
Stocks across the board got a big boost Friday after a strong jobs report for May and the Senate’s passage of a debt ceiling bill Thursday night, which allowed the U.S. to avert default. President Joe Biden still has to sign the bill.
While last week’s gains were spurred by Nvidia’s earnings report and a surge in optimism around demand for technologies powering artificial intelligence workloads, this week didn’t see any notable news in the mega-cap group. But there was continued upward momentum.
Among the most-valuable Nasdaq companies, Tesla led the way, with an 11% increase for the week. Shares of the electric vehicle maker are now up 74% for the year after losing roughly two-thirds of its value in 2022.
Tesla and Nvidia, which has climbed 169% this year, have helped pull the Nasdaq up 27% in 2023, far outpacing the S&P 500 and Dow Jones Industrial Average. After peaking in late 2021, the Nasdaq plummeted 33% last year, its steepest drop since the financial crisis, on concerns surrounding inflation and rising interest rates. The index is still about 18% off its all-time high.
“I’m focusing on mega-cap tech here and semiconductors as well,” said Danielle Shay, vice president of options at Simpler Trading, in an interview on CNBC’s “The Exchange” on Friday. “The AI trade has been absolutely phenomenal.”
In the cloud software corner of tech, some earnings reports are still providing a boost.
MongoDB, the developer of a cloud-based database, jumped 33% for the week. The company on Thursday reported earnings and revenue that topped analysts’ estimates and raised its guidance for fiscal 2024.
On MongoDB’s earnings call, CEO Dev Ittycheria said his company’s products are seeing increased usage as clients look for efficiencies and cut costs.
“It’s clear customers continue to scrutinize their technology investments and must decide which technologies are a must-have, versus merely nice to have,” he said.
Cybersecurity vendor SentinelOne and software developer PagerDuty experienced the flipside of the equation.
SentinelOne plunged 35% for the week after the company lowered its guidance and announced layoffs. Chief Financial Officer David Bernhardt said on SentinelOne’s earnings call large customers have been using the technology less and, due to the “current macro environment, we expect these lower usage and consumption trends to persist.”
PagerDuty dropped 14% this week. The provider of technology that helps IT departments respond to incidents slashed its forecast for the year “in anticipation of continued pressure” at small- and medium-size businesses, CFO Howard Wilson said on the call.
Here are the biggest calls on Wall Street on Friday: Barclays names Dick’s a top pick Barclays named the sporting goods store a top pick and says it sees accelerating growth. “We view 2022 as the new solid foundation from which DKS can now reaccelerate • its growth algorithm through: 1) sustainable positive comp growth driving market share gains, 2) gross and operating margin expansion as it exits a period of supply chain disruption.” HBSC upgrades AT & T to buy from hold HSBC said in its upgrade of the stock after its earnings report that investors should buy the dip. “But a slowdown in market momentum has been widely flagged (by all operators) for months, and AT & T’ s absolute growth in mobile subs remained solid.” Read more about this call here . Bank of America reiterates Alphabet as buy Bank of America says it’s bullish heading into Alphabet earnings next week. “We think 1Q could show cost improvement upside, while in-line search results could be a modest positive for market share concerns (we think street will see better evidence of cost cutting and margin improvement by 2Q).” JPMorgan reiterates Amazon as a best idea JPMorgan says it’s bullish heading into the e-commerce giant’s earnings report next week. “We’re modeling continued e-comm share gains in 2023 as AMZN & other retailers gain share in key under-penetrated categories such as grocery, CPG, apparel & accessories, & furniture/appliances/equipment.” Morgan Stanley reiterates Blackstone as overweight Morgan Stanley says the alternative investment management company is “resilient.” “We believe BX is best positioned to navigate the backdrop, capitalize on dislocation with $190b dry powder & propel earnings power.” Argus upgrades Dollar General to buy from hold Argus said in its upgrade of the dollar store company that it’s “rare retailer.” “We are raising our rating on Dollar General Corp . to BUY from HOLD and setting a one-year price target of $250. DG is a rare retailer that is growing square footage and posting positive comparable sales. Our five-year growth rate is 11%.” UBS initiates Bill.com as buy UBS said in its initiation of the software billing company that shares are attractive at current levels. “Since we’re a bit more constructive than the Street and negativity already seems embedded in BILL shares (amongst worst performing software stocks YTD), we view risk/reward as biased upward at these levels.” Piper Sandler downgrades Big Lots to underweight from neutral Piper said in its downgrade of Big Lots that it sees demand slowing. “Big ticket discretionary demand appears to be deteriorating (despite easier y/y compares), and we are worried about companies with break-even EBITDA (or worse).” Morgan Stanley downgrades Seagate to equal weight from overweight Morgan Stanley said in its downgrade of Seagate that it sees a recovery pushout for the hard disc data drive company. “As a result, we believe path to outperformance has also been pushed out, with risk more elevated near term.” Wells Fargo names Starbucks a top pick into earnings Wells says Starbucks is a “best idea” heading into earnings on May 2 and the “China inflection adds upside.” “Shares are -2% post-Q1 & we see improving Q2 risk/reward behind ongoing domestic strength (positive Q2 traffic; Ex 29), a likely China inflection (vs. a very low Q2 bar) & anticipated upside to the FY23 outlook.” Cantor Fitzgerald initiates CVS as buy Cantor said in its initiation of the stock that it’s underappreciated. “We are initiating coverage of CVS Health with an Overweight rating and 12-month price target of $87; Investors are underestimating the power of the flywheel CVS is piecing together, in our opinion.” Cantor Fitzgerald initiates UnitedHealth as buy Cantor said in its initiation of the healthcare company that it sees near-term earnings upside. ” United is ahead of the market in using commercial product innovation to solve for the problem of employers wanting to hold price trends, while providers are looking for a three-year step-up from historical averages.” Benchmark initiates Sea Limited as buy Benchmark initiated the Singapore-based internet tech company with a buy and says it sees rapid growth ahead. “We believe that SE should remain a key beneficiary of Southeast Asia’s fast growing digital economy in years to come.” Benchmark initiates Grab Holdings as buy Benchmark said in its initiation of the Asian internet company that it’s a “significant market consolidator” “As part of our industry launch of Southeast Asia Ecommerce, we are initiating coverage of GRAB, a leading platform player offering mobility, delivery, fintech and enterprise services in SEA (Southeast Asia Ecommerce).” JPMorgan upgrades XPO to overweight from neutral JPMorgan said in its upgrade of the logistics company that it likes the company’s recent management changes. “Our estimates remain unchanged but we are upgrading to Overweight with a higher, yet still discounted, multiple compared to peers as we believe this strategic hire should help unlock the potential at XPO which is still not completely reflected in the stock.” Read more about this call here. Goldman Sachs reiterates Philip Morris as buy Goldman says the tobacco company is an “earnings compounder with attractive valuation.” “Ultimately, we believe mgmt’s Q2 guide is conservative and therefore we see a nice set up for a potential beat and raise quarter. This, in addition to PM’s Investor Day in September, should be positive catalysts for the stock.” Read more about this call here. Morgan Stanley reiterates Spotify as overweight Morgan Stanley raised its price target on the stock to $160 per share from $130 and says “price increases, margin expansion, and market share” will drive the stock. “We continue to see streaming music & audio as an attractive growth market and remain OW WMG and SPOT.” Wells Fargo reiterates Microsoft as overweight Wells says expectations are “mixed” heading into earnings next week, but that the firm is standing by the stock. “While optimizations and macro are likely to impact FQ3 results, we see favorable offsets forming beyond, inc. MSFT’s ability to both consolidate spend from incumbent categories (productivity, biz apps, security) & gain share in newer ones.” Truist downgrades Tesla to hold from buy Truist said in its downgrade of the stock that it was surprised by the company’s “willingness to accept lower margins.” “What surprised us is TSLA’s stated willingness to reduce price further, accepting still lower automotive margins, to broaden & deepen its ability to generate revenue from AI projects, most notably FSD.” Goldman Sachs reiterates ServiceNow as buy Goldman says it’s bullish heading into the work flow solutions company’s earnings report next week. “We expect investors to put more weight on NOW’ s 1Q results, despite it being a seasonally weak quarter, as they look for signs of continued durability.” Truist initiates CyberArk as buy Truist initiated the cyber security company with a buy and says it has a first mover advantage. ” CYBR is a leader in Privilege Access Management, which is becoming a critical layer of cybersecurity and center of identity security. The company’s transition to a subscription-based model has resulted in strong visibility and durability of its business as well as higher customer lifetime value.” Baird reiterates McDonald’s as outperform Baird says it’s bullish heading into earnings next week. “We see potential for Q1 comps/EPS to exceed estimates (perhaps already priced in?), and we continue to believe MCD can fuel solid operating momentum in the balance of 2023 despite possible economic headwinds.” Stephens upgrades Pool Corp. to overweight from equal weight Stephens said in its upgrade of Pool that it sees an “attractive entry point” for the pool company. “The stock could tread water in the ultra-near-term as seasonally it is still too early to fully gauge activity levels, which could keep investors waiting. However, we think 20x next year’s earnings for a best-in-class, high quality compounder that consistently puts up 25%-30% ROIC, consistent market out-performance and strong FCF is an attractive entry point.” Stephens initiates SentinelOne as overweight Stephens initiated the cyber security company with an overweight and says it has “best-in-class growth.” ” SentinelOne’s platform addresses many of the highest priority areas of security spending.” JPMorgan reiterates Charles Schwab as overweight JPMorgan says Charles Schwab could be worth more if it were to “de-bank.” “While earnings would fall materially were Schwab to de-bank, we believe Schwab would trade at a higher (possibly meaningfully higher) multiple, which would/ could justify a higher value than the stock is trading at today. … .Schwab could feasibly de-bank. Schwab is not a bank, but rather is a broker that operates a bank, and as such we see it feasible that Schwab could operate without a bank.”
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.
