Why Big Data Palantir, MongoDB, and C3.ai Stocks Dipped Hard on Tuesday

What happened

Big data oriented software stock actions palantir (PLTR) -4.61%), MongoDB (MDB) -4.37%)Y C3.ai (AI -4.59%) it fell much more than the current market, down 4.4%, 4.5%, and 4.6%, respectively, at 1:56 p.m. ET.

There wasn’t much company-specific news today; in fact, the only recent news on these three big data stocks has generally been positive.

Still, none of these three unprofitable growth tech stocks are in favor right now, as investors appear to be fleeing tech stocks for profitable “old economy” stocks. This is especially true since interest rates went up again today.

In addition, the end-of-year tax loss sell-off may also be playing a role in the declines of big-losing stocks so far this year, which these three have in spades.

So what

Although long-term bond yields have fallen since peaking at the end of October, they have risen recently. Today, the 10 years Treasury bond the yield was rising again from its recent lows, up 11 basis points today alone at 3.86%.

When bond yields go up, that tends to go down. growth tech stocks that are not profitable or are trading at a very high multiple of earnings. The higher the interest rates, the more future earnings are discounted, and the longer-term earnings in the future are discounted the most.

That certainly fits the bill for these three stocks. Although each of these companies shows great promise in the growing field of using massive amounts of data to improve decision making and business outcomes, all three are losing significant amounts of money in a GAAP basis as they spend a lot to capture that growth.

Data source: Yahoo! Finance. TTM= 12-month follow-up.

However, future growth is not a certainty, competition is fierce, and every company is also showing some slowing top-line numbers as they come off the acceleration in digitization brought on by the pandemic. In fact, C3.ai experienced a slowdown in revenue growth to just 7.1% in the last quarter.

So it’s been the worst of all possible worlds for growth tech stocks like these in 2022: growth slowed tough comparisons, resetting lower expectations for future growth; and interest rates soared further, further depressing the value of those reduced earnings expectations.

Today, there may be another headwind to contend with: tax loss sale. Investors with big losses on stocks may be selling their shares right now to capture losses for 2022. If investors sell at a loss and don’t buy back for at least 30 days, they can offset other capital gains they may have. And if the loss is short-term—meaning a stock purchased less than a year ago—that loss can offset not only capital gains but up to $3,000 in income as well.

Now what

It should be noted that there has been some positive news for these stocks. Both Palantir and C3.ai recently won awards in the defense industry. Palantir recently won a contract with the UK MoD for £75m, while C3.ai secured a deal with the US Missile Defense Agency. Meanwhile, MongoDB has just received an improved price target from Needham & Company analysts on December 21 and reported a sharp rise in earnings earlier this month.

Still, these positives are simply not enough to overcome the uncertainty around underperforming stocks in a rising rate environment. Until these companies start generating real GAAP earnings, it will be hard to find investors safe enough to back them. One thing that could help is if interest rates fall again, but we may be in a new era of higher rates that could last for a while, so don’t count on that scenario.