Why CrowdStrike, MongoDB, and HubSpot went under today

What happened

Cybersecurity Company Stocks crowdstrike (CRWD -8.74%)database disruptor MongoDB (MDB -11.06%)and customer management and online marketing platform hubspot (BUSHINGS -9.49%) they were down big today. As of 2:30 pm ET, these shares were down 8.4%, 10.2%, and 10.4%, respectively.

There wasn’t much company-specific news today; however, last week’s inflation reading was enough to trigger a big sell-off last Friday and today. While these stocks are still best in class and performing quite well, investors should note that they are also highly valued. That is why they are selling so much in this regime change market at higher interest rates.

And that

Last week, the Consumer Price Index (CPI) figures for May were better than expected, even though the expected figures were already high. Unfortunately, although investors had expected the March inflation figures to have reached “peak” inflation, that apparently was not the case. More worrying was the “core” CPI, which strips out food and energy prices that were known to be high. That year-over-year figure was 6%, higher than the expected figure of 5.9%.

Even though there was a significant sell-off on Friday, it looks like more investors are dumping tech names today, especially growth stocks. Growth tech stocks that were bid during the last few years of COVID and low interest rates are still taking a big hit, even though they are already down a lot from their highs.

This can be frustrating for many as these companies are generally performing very well. All three companies recently reported earnings and showed big numbers at the operating level. All three easily beat their revenue and earnings estimates, with CrowdStrike seeing 61% revenue growth, MongoDB seeing 56% growth, and HubSpot seeing 41% growth—all strong numbers, especially during the tumultuous first quarter.

The problem? Since neither company currently has GAAP net earnings, investors have become more skeptical about their valuations. Unfortunately, if rates and inflation stay high, high rates are a killer for growth stocks with most of their earnings in the future. Meanwhile, if the Federal Reserve raises rates faster and triggers an economic downturn, growth could slow. So the bullish cocktail of low rates and high growth during the pandemic is reversing both ways.

CRWD PS Ratio Chart

CRWD PS Ratio data by YCharts

Now what

There was once a time when a 10x price-to-sales ratio was only considered for the highest quality growth stocks; As you can see, MongoDB and CrowdStrike are still trading well above that, even after their sell-offs over the last six months, and HubSpot is trading just under 10x sales.

The big question for these stocks may be long-term interest rates. The 10-year Treasury bond rose to 3.35% today as of this writing, a level not seen since 2011. This is also the highest long-term rate since these companies went public. Therefore, investors should be prepared for a new valuation regime for each.

Personally, I have sold a lot of my growth stocks at no gain over the last six months as it is not very clear where long-term rates and inflation will end up this year. However, those with a very long time horizon and big capital gains may want to stick around, as these three names remain best-in-class and should thrive for the next decade.

However, with its stock price soaring, that path could remain rocky until inflation is under control. Basically, things could continue to be very bumpy this year, and investors should brace for more potential declines in these highly valued growth stocks, even if their businesses continue to perform well.

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