Why software stocks got hammered today

We’re nearly at the stopping point ahead of a long weekend here in the United States, but that doesn’t mean that the tech market has given up on making news. And the news is not good.

In the wake of Snap’s layoffs and startup staff-cutting galore, you are likely not surprised that there is some bad news out and about in the tech market. But today’s ill tidings are a bit worse than just another round of lackluster headlines — after managing to stabilize, the value of software stocks took more blows today.

For startups, falling stock prices among their public comparables can mean lower exit prices and less generous valuations when they fundraise. And after enduring quarter after quarter of their public-market brethren shedding value, some of the biggest names in tech are at it again.

The carnage was not slight. The cloud-stock index compiled by venture firm Bessemer, which trades under the $WCLD ticker, lost 4.8% of its value today, a recovery from earlier in the day. What powered those declines? In part, revaluations of Okta and MongoDB, two companies that went public back in 2017.

All happy companies are alike, but every unhappy company is unhappy in its own way. By that, we mean that Okta’s issues are not precisely the same as those we’re seeing at Mongo. Let’s explore.

What happened?

Okta discussed its financial results with investors yesterday after the bell, sharing that it is “starting to notice some tightening of IT budgets and lengthening sales cycles relative to last quarter.” What does that mean for the single sign-on company? It now believes that “the weakening economy is having some impact on [its] business.”

Is that enough to drive a drop of more than 30% in its value today? No, but the company has other issues as well. Again, from its earnings call:

[T]he third area we examined was impact from the integration of the Okta and Auth0 sales teams, which occurred at the beginning of this fiscal year. [ … ] Integrations are always difficult and touch every part of an organization. While we are making progress, we’ve experienced heightened attrition within the go-to-market organization, as well as some confusion in the field, both of which have impacted our business momentum.

Okta is seeing both a market that is proving more difficult as well as some internal friction after an acquisition. Its CFO summarized the situation, saying that his company is “factoring in [its] Q2 performance sales integration challenges, [and] heightened sales attrition in an evolving economic environment,” when discussing its current fiscal quarter.

Investors pushed Okta to $60.60 per share by the end of regular trading, down $30.80 per share, or 33.7%. With a 52-week high of $276.30, per YCharts data, Okta has been sharply repriced since its 2021 valuation peaks.

Okta is not alone in having a rough day of it. MongoDB was off 25.32% today to $241.11 per share, far under its $590.00 per-share high from the last 52 weeks, again per YCharts data.

Is Mongo also enduring growth-related issues? Not really. Instead, it’s having profit troubles, it appears. The company now expects to lose between 28 to 35 cents per share in its current fiscal year, a bit worse than the loss of 16 to 31 cents it had noted in its prior quarter. Still, the company raised its full-year guidance from $1.172 billion to $1.192 billion to $1.196 billion to $1.206 billion. It wasn’t enough.

Snap’s selloff came as the company announced a variety of decisions to shake up its business, including paring some efforts and laying off around 20% of its staff. Okta got taken to task for what seems like a minor infraction (MarketWatch notes that the company’s “executives hiked their annual earnings outlook again Wednesday but kept their target for full-year revenue the same” — hardly a disaster!) And for MongoDB, more growth wasn’t enough to keep its valuation stable.

None of this is to really point a finger at Okta or MongoDB; they have been public for around a half-decade apiece and are going to be public in another five unless someone huge buys them. We instead raise their results to highlight how easily triggered investors appear when it comes to companies that have the sort of revenue multiples that startups covet when they go public (YCharts lists Mongo’s price/sales ratio at 16.3x, for example).

Those valuation marks are harder to hold onto than they were.

Such a market could limit IPOs, but as there haven’t been any, it’s hard to bemoan a continued zeroing-out of public listings. Instead, it’s the sheer valuation pressure that Okta and Mongo endured today that has us trying to parse what the companies did to engender such a response.

But it’s not all gloom out there for software companies. There’s some good news to be found. CrowdStrike, in its earnings call earlier in the week, had this to say:

Moving to our markets, the competitive environment remains favorable and our win rates remain consistent. We continue to see strong demand even as organizations responded to macroeconomic conditions. For CrowdStrike, this primarily manifested in the form of increased levels of required approvals on some deals as companies evaluated investment priorities, which can extend the time it takes to close deals. However, cybersecurity is not a discretionary line item.

More about cybersecurity in the morning.