What happened
After spending several weeks caught in a downdraft, a number of technology stocks are sharply higher this week, as investors are on the prowl for bargains.
Here's a look at how some volatile, high-growth stocks are faring so far this week, according to data from S&P Global Market Intelligence:
- Coupa Software (COUP), up 14.5%.
- Zendesk (ZEN), up 11.4%.
- Datadog (DDOG 3.58%), up 9.3%.
- MongoDB (MDB 7.69%), up 9%.
- The Trade Desk (TTD 4.15%), up 8.6%.
Image source: Getty Images.
So what
There wasn't much in the way of company-specific news driving these stocks higher, but there's a common theme that was evident in the preceding two weeks, which might help explain the trend.
- Database specialist MongoDB had slumped 11.6%, with a price-to-sales (P/S) ratio of 39.
- Business-spend management platform Coupa Software tumbled roughly 9.8%, trading at 25 times sales.
- Customer support specialist Zendesk fell 8.5%, changing hands at 11 times sales.
- Digital advertising kingpin The Trade Desk declined 7.1%, with a P/S of 34.
- Cloud monitoring specialist Datadog dropped 4.8%, trading at 56 times sales.
To give those numbers context, the S&P 500 declined 1.4% during the same period, while the tech-heavy Nasdaq Composite lost 3.1% of its value. Additionally, a good P/S ratio is typically between 1 and 2, so each of these stocks was on the pricey side, helping add to the downward pressure.
September was a brutal month for technology stocks, causing the Nasdaq to lose 5.3% of its value. The rout continued into the early part of October, before these fast-growers were able to regain their footing.
Data by YCharts.
Now what
What caused those initial steep declines? The yield on U.S. Treasuries spiked during the same period, climbing to its highest level in months, making bonds more attractive. The flight to safety increased as investors grew more apprehensive about the potential for a prolonged period of inflation.
That fear was exacerbated last month when Federal Reserve Chairman Jerome Powell, in remarks before the U.S. Senate, warned that supply chain issues might push inflation higher over the short term. "Inflation is elevated and will likely remain so in coming months before moderating," he said.
Additionally, each of the highfliers beat the broader market indexes in 2020, with four of the five notching triple-digit gains. The Trade Desk, MongoDB, and Datadog surged 208%, 173%, and 161%, respectively. Similarly, Coupa Software and Zendesk soared 132% and 87%, respectively. The common thread that unites these companies is their cloud-based offerings, which are in high demand during the pandemic. After such notable gains, some investors sold shares in an effort to lock in gains.
After the recent multiweek downturn, particularly among high-growth stocks, most of these companies were selling at a discount, with investors moving in to scoop up the bargains.
It's important to note that each of these companies is positioning itself to succeed over the long term, regardless of short-term headwinds like inflation rates or bond yields. Over the long term, stock prices will follow business performance -- and each of these companies is doing just fine.
