What happened
Shares of Snowflake (SNOW -1.61%), Datadog (DDOG -1.43%), and HubSpot (HUBS -2.40%) soared Thursday, closing the session up 6.1%, 6.7%, and 8%, respectively.
There wasn't any company-specific news about any of them Thursday, although there had been earlier in the week. More likely, traders buying these enterprise software all-stars were responding to two things. First, the Commerce Department released first-quarter U.S. gross domestic product data showing a contraction of 1.4%. That was disappointing, but it may lead the Federal Reserve to temper its plans for interest rate hikes. Second, other large-cap tech companies have been reporting earnings this week. The preliminary read-through from those reports is that enterprise spending still remains strong, even if there are patches of consumer softness. That provides investors with good reason to expect positive news when these companies report next month.
Combine these factors with previously beaten-down share prices, and you have the recipe for Thursday's big gains.
So what
On Thursday, the Commerce Department released its initial estimate of first-quarter GDP, which it said contracted 1.4% on an annualized basis. That was worse than the 1% contraction predicted by analysts. Inflation, the war in Ukraine, and ongoing supply chain problems all conspired to drag on the economy, and consumer spending grew less than anticipated.
This may be another case of "bad news is good news" for high-growth tech stocks that trade at high multiples such as Snowflake, Datadog, and HubSpot. That's because weaker economic data could mean the Federal Reserve won't have to raise rates as far or as quickly. Higher interest rates stand to hurt growth stocks disproportionately as they depress the current intrinsic value of future earnings.
Additionally, while the overall economy may be sagging, it appears growth in the cloud computing industry isn't skipping a beat. Both Microsoft and Alphabet reported earlier this week, and while Alphabet missed estimates, that was entirely due to YouTube advertising. Both companies showed better-than-expected cloud growth. That certainly bodes well for both Snowflake, which operates the world's premier cloud data lake service, and Datadog, which offers a best-in-class cloud-based application observability suite.
Datadog was actually named a preferred partner for Microsoft's Azure cloud service in late March, so the torrid 46% growth rate Azure achieved was likely music to the ears of Datadog shareholders.
Meanwhile, Snowflake received a positive initiation from Wolfe Research on Monday. Wolfe likes Snowflake's competitive positioning, management team, and growth outlook. Its analysts think these positive factors outweigh the valuation concerns, and they predict the stock could rise by 50% from Monday's beaten-down levels over the next 12 months.
HubSpot, by contrast, received a negative note on Tuesday, with UBS analysts initiating the company at neutral and a $410 price target, based on worries that the company may have a hard time adding incremental customers. HubSpot experienced huge adoption earlier in the pandemic as small and medium-sized enterprises flocked to its leading inbound marketing platform to reach their customers.
Yet some better-than-feared numbers out of Meta Platforms and other social media stocks this week could perhaps indicate that the market's fears over the health of U.S. small businesses were overdone. That could be why HubSpot bounced back even harder Thursday.
Image source: Getty Images.
Now what
Is the tech wreck over? That's what investors have to ask themselves. Since there is still a lot of uncertainty about the path of interest rates and inflation in the economy, it will be really hard to time the bottom of the sell-off in high-growth tech names. Likely, these stocks will remain volatile going into next week's Fed meeting. In addition, HubSpot and Datadog report their first-quarter numbers next week.
Despite Thursday's gains, both Snowflake and HubSpot remain more than 50% off their highs, and Datadog is down by about 35% from its peak. Could they fall further? Sure, but each is a high-quality growth company led by an excellent management team. Interested investors with long-term orientations may therefore wish to add to their positions. However, each of these stocks is still expensive based on traditional valuation metrics, so they may not be appropriate for older investors who are closer to retirement, despite their recent price drops.
