We can understand why high-growth tech stocks continue to be on the radar of investors. These investments provide the potential for exponential returns. In a bull run, these companies crush market returns. However, in a sell-off, high growth tech stocks grossly underperform broader markets due to their premium valuation.
Here, I identified three tech stocks that will be vulnerable in a bear market.
Alteryx outperformed tech stocks and ETFs
Alteryx (NYSE: AYX) shares are trading at $119.9. The data analytics company’s stock went public in March 2017. It has returned 675% since then. Alteryx sales grew from $132 million in 2017 to $204 million in 2018. Analysts expect sales to grow by 92% in 2019 to $392 million. Also, they expect it to grow by 32.4% to $519 million in 2020 and 29% to $669 million in 2021.
While revenue growth is decelerating, it is still robust enough to keep investors interested. The demand for data analytics products will continue to drive top-line growth for Alteryx. In the September quarter, Alteryx added 335 new customers, including 27 of the Global 2000 companies.
The tech stock expects majority automation in the future
AYX will continue to benefit from the enterprise focus on digital transformation. However, global IT spending is expected to grow at a modest pace in 2020. IDC estimates enterprises to spend $2 trillion in digital transformation in 2019. Also, AYX emphasized a World Economic Forum Data statistic that says machines will perform 42% of all work by the end of 2022, up from 29% in 2019.
AYX stock claimed that industry experts believe a large portion of data science tasks will be automated by 2020. According to the company, employees spend considerable resources on repetitive tasks that can be automated. The Alteryx platform focuses on automating these tasks to increase productivity and efficiency.
During the last earnings call, AYX CEO Dean Stoecker said, “Alteryx Designer enables companies to build workflows to automate data science and analytic pipelines and Alteryx Server orchestrates these pipelines autonomously yet in scheduled scaled secured and governed ways.”
He added, “This type of advanced analytic process automation is increasingly important and our messaging is resonating with chief data officers overseeing digital transformation efforts for enterprises around the world.”
Twilio could reach $1.84 billion in sales by 2021
Twilio (NYSE: TWLO) shares are trading at $115.7. The cloud communications tech stock went public in June 2016. It has returned 340% since then. Twilio sales grew from $277 million in 2017 to $650 million in 2018. Also, analysts expect sales to grow by 72% in 2019 to $1.11 billion. Continuing the trend, they expect it to grow by 31.2% to $1.46 billion in 2020 and 26% to $1.84 billion in 2021.
TWLO stock enables enterprises to develop and operate real-time communications within software applications. Similar to AYX, Twilio will see a deceleration in revenue growth. In the September quarter, Twilio added 50 Global 2000 accounts. So, this drove sales higher by 75%.
Splunk stock returns 331% since 2012
Splunk (NASDAQ: SPLK) develops and markets enterprise software solutions. Its products enable users to collect, analyze, and explore large data sets. The stock went public in April 2012. It has returned 331% since then.
Splunk sales grew from $950 million in fiscal 2017 to $1.8 billion in fiscal 2019 (year ending in January). Analysts expect sales to grow by 30.3% in 2020 to $2.35 billion, 22.7% to $2.88 billion in 2021 and 22.6% to $3.53 billion in 2021.
In the October quarter, the tech stock increased software sales by 40%, and cloud sales by 78%. Meanwhile, total sales growth reached 30%. It completed three acquisitions to take advantage of the growing opportunities in IT operations, software development, and security.
Splunk claims that several companies have managed to streamline IT operations and protect customers from security threats by leveraging their data insights.
Why will these tech stocks lose market value?
While all three companies are part of high growth industries, the recent bull run drove valuations to unsustainable levels. High growth tech stocks command a premium valuation. However, this also means any earnings miss or less than expected financial forecast will drag these stocks lower. In case a recession hits markets in 2020, it will lead to a further slowdown in enterprise spending. So, this will severely impact revenue growth estimates for these tech stocks.
Alteryx is valued at $8.26 billion or 21x forward sales. The tech stock’s forward price-to-earnings multiple stands at 144x. Meanwhile, the price-to-sales ratio is 23.6x. It has a price-to-book ratio of 20 while the EV-to-EBITDA multiple is 289x. Comparatively, analysts expect AYX earnings growth to increase by an annual rate of 40% in the next five years.
Twilio’s market cap stands at $16.16 billion or 21x forward sales. The stock’s forward price-to-earnings multiple stands at 463x while the price-to-sales ratio is 16x. It has a price-to-book ratio of 3.7. Also, the EV-to-EBITDA multiple is -63x. In comparison, analysts expect Twilio earnings growth to increase by an annual rate of 15.6% in the next five years.
Splunk’s market cap stands at $24.5 billion or 10.4x forward sales. The tech stock’s forward price-to-earnings multiple stands at 66x. Meanwhile, the price-to-sales ratio is 11.2x. It has a price-to-book ratio of 13.3 while the EV-to-EBITDA multiple is -129.8x. In comparison, analysts expect Splunk earnings growth to increase by an annual rate of 35.3% in the next five years.
Tech stock summary
Analysts have a 12-month average price target of $164 for Splunk. So, this is 5.2% above the current trading price. Comparatively, Alteryx and Twilio are trading at a discount of 5.9% and 14%, respectively, to average analyst estimates.