Growth Companies Decline

I am a firm believer in investing in growth companies for outsized returns.

Recently, there is quite a decline in stock prices of some of my favourite companies like SE, DDOG, UPST, CRWD etc

The drop started in Nov/Dec 2021, and seems to be carrying on in Jan 2022.

Thoughts:

My first inclination is to assess the reason for the sell-off:

1. Did deteriorating fundamentals cause the decline in share prices?
2. Or is it more of a broad-based sell-off?

I will be concerned in 1.

But when 2. happens, where companies are declining at the same time, there is usually nothing to be worried about. (except finding more cash to buy more!)

There was a time where 2. worries me too, but after observing the flow of the markets over the years, I realized this occurrence is actually quite common and perfectly normal.

Seasoned investors will realize it happens 2–3 times a year on average. Markets rotate in and out of all kinds of things, including hypergrowth. This caused certain sectors to drop 20–30% or more periodically.

What is happening?

There is rising inflation due to global supply chain issues. The US Fed has chosen to combat this by increasing interest rates.

Some growth companies need to borrow money to maintain their high growth expansion. They do not have a clear path to profitability yet. When cost of borrowing goes up, the cost of future expansion goes up too. This makes these growth companies less attractive to investors, and thus valuation contraction occurs.

Simply put, the narrative in the markets right now is: the risk associated with growth stocks has increased, they are not as attractive compared to previously (because of higher int rates), therefore investors are rotating out of Growth sectors.

Fears:

It’s this narrative that is creating fear and causing the sell-off. When stocks prices are down, there will be the usual naysayers. Doubters will say “this time is different” “growth stocks will never come back” etc. Yet, every single time, they are proven wrong.

Stay Calm:

In times like this, it helps to stay cool and think logically:

1. Nothing has changed about my companies at all
2. They are still growing at a great speed of 50–80%+
3. Most of the companies that I owned have a clear path to profitability
4. Valuation multiples will have to bounce back up eventually
5. Meaning there’s nothing to worry about
6. And I should stop anchoring my companies’ worth based on their stock price movements

The only question is when they will bounce back...

In the next post, I will share some of my predictions on when will these companies start to recover, and some portfolio adjustments I made. Do subscribe to stay notified of the latest updates! :)

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