Shares of Monday.com (MNDY 0.64%) fell 16.2% last month, according to data from S&P Global Market Intelligence. The stock received a ratings downgrade from a high-profile analyst on Wall Street, which sent it tumbling amid negative sentiment related to key macroeconomic data.
Some bad news instigated the drop
Monday.com received a downgrade from Citibank (C 0.84%) on April 10. Citi's analysts remain bullish about the company's product portfolio and overall performance. However, they suggested that the stock's valuation was evidence of overblown investor optimism and growth expectations that may be difficult to meet.
Image source: Getty Images.
There was some merit to that argument. Monday.com's forward P/E ratio was over 100, and its price-to-free-cash-flow ratio was over 50. Those are somewhat high when compared to the company's 28% to 30% revenue growth forecast for 2024. Both ratios dropped lower as the stock slid, indicating that investors applied scrutiny to the company's valuation without making any drastic changes to the near-term outlook.
CRM PE Ratio (Forward) data by YCharts
High-beta stocks with expensive valuations can be susceptible to volatility any time there's a credible challenge to their growth narrative, and that appears to have bitten Monday.com in early April.
Difficult market conditions made things worse
April's challenging macro environment compounded the effect of the bad news. It was a rough month for growth stocks and the tech sector. The Vanguard Growth ETF (VUG 1.59%) moved 4.5% lower, while the Technology Sector Select SPDR ETF (XLK 1.76%) fell 6.7%. Fresh economic data showed higher-than-expected inflation and surprisingly strong employment conditions. These indicators forced investors to revise their expected timeline for Federal Reserve interest rate cuts. These indicators are likely to keep the central bank from slashing interest rates until later this year, and growth stocks tend to perform relatively poorly when rates are high.
Monday.com's price chart is compelling evidence that the stock shares important price drivers with those ETFs. While analyst downgrades influenced the stock's performance, it's clear that overall market conditions also played a significant role.
Monday.com's operational performance has been impressive. It's growing quickly, retaining customers, expanding existing customer relationships, and generating cash. The company's recent results have surpassed analyst expectations, which is good for investors. The company offers a high-quality suite of products that are getting even more popular as remote work and productivity software become commonplace. Those are bullish long-term features. Nonetheless, the stock's performance in April illustrates the volatile nature of expensive growth stocks. Investors need to be comfortable with volatility if they're going to own a stock with this sort of valuation.
