Market volatility creating opportunities

Nasdaq Photo: Shutterstock
Nasdaq Photo: Shutterstock

Investors are punishing growth stocks that fail to live up to expectations, but the punishment doesn't always fit the crime.

The uncertainty in the global economy has left its mark on the capital market, both in company financials and in the reactions, sometimes extreme, of investors to those financials. In periods of uncertainty, volatility on the market rises, as manifest in the VIX index, Wall Street’s "fear index".

Against the background of inflation and attempts to curb it through higher interest rates, giving rise to fears of economic slowdown, alongside continuing supply chain difficulties, the war in Ukraine, and lockdowns in China, stock markets are very nervous. This expresses itself in daily falls of 3% or 4% in the leading indices that have become common, and, when it comes to individual stocks, double digit price changes in a day are not rare.

In this kind of situation, companies whose financials miss analysts’ estimates or that cut their annual guidance because of the macro-economic uncertainty or for any other reason are punished with extra severity. They are liable to lose a quarter or a third of their values when their results are released.

Only last week we saw four such cases among Israeli technology companies traded on Wall Street. Kornit Digital lost a third of its value on the day it released its first quarter financials, while Fiverr lost over a quarter of its value. The next day, it was the turn of ironSource and Outbrain, which lost 18% and 20% and respectively. Incidentally, two Israeli technology companies, Hippo and Payoneer, stood out with sharp rises of over 30%, but that was after their share prices had fallen to lows shortly before. Of the companies that have reported this week, Wix has been fairly steady and has fallen about 6%.

Oppenheimer senior equity analyst Sergey Vastchenok says that the phenomenon of steep share price falls stems from "the market’s nervousness, and the degree of disappointment in this or that growth company."

He adds that there are two parallel phenomena in the current reporting season: a slowdown in growth rates - seen in guidance below market expectations - and companies continuing to expand expenditure. "I don’t see them stopping at this point," he says. "All this is accompanied by interest rates on the rise, making money more expensive. In general, the Nasdaq index is underperforming nearly every day, falling by more than the S&P 500, which indicates investors fleeing growth companies.

"Multiples are also correcting downwards. If previously, when people talked about sales multiples, they argued over whether a multiple of 10 was cheap or expensive, today, the fastest growing companies are traded at multiples of 6-7, and most companies are traded at 1-3. Investors are stressing profitability, and if they don’t see profitability improving, they are voting with their feet."

Of Kornit Digital, which held a share offering recently, and companies that raised money last year through mergers with SPACs, Vastchenok says, "Investors went in who did not understand the company’s activity very well, and who assumed that that there would be crazy growth, and if growth slows, they don’t think twice and don’t examine in depth. That causes high volatility, and of course the less activity there is by private investors in a certain stock, the higher volatility rises. Things like this create investment opportunities.

"Many companies have not managed to build a base of strong, long-term investors who understand the company’s story, have run with it for several year and know what to expect.

"Kornit Digital, for example, is an excellent company, but its share price previously rose far beyond its fair value, in my opinion. It has been brought down to below its pre-pandemic level, which is the other extreme, because at that time Kornit Digital had sales of half what they are today and was less profitable. That creates an opportunity."

Another opportunity that Vastchenok identifies is in ironSource. "That is an exceptional case. It plummeted 80% from its peak and is being traded at a multiple of 13 on next year’s profit. This is a company that is growing by tens of percentage points and that makes money. There’s illogical pricing here."

Nasdaq Photo: Shutterstock
Nasdaq Photo: Shutterstock
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