What happened
Shares of enterprise software stars Snowflake (SNOW -1.99%), Datadog (DDOG -3.94%), and HubSpot (HUBS -2.82%) rallied today, up 9.2%, 11.5%, and 9.1%, respectively, as of 12:56 p.m. ET.
There wasn't any material news out of these three high-growth stocks. As with so many market moves these days outside of earnings, macroeconomic factors -- especially those related to long-term bond yields -- told the story.
So what
Yesterday was a brutal day for the markets and the technology sector, and these three enterprise software companies were no exception. However, they're bouncing back much more than other stocks that also fell yesterday. The two stocks mainly responsible for yesterday's crash -- Target and Walmart -- are actually down again today.
Those consumer staples stocks had held up relatively well this year as tech swooned. However, Walmart's and Target's earnings report showed mediocre revenue growth but also a plunge in earnings and forward earnings guidance as costs exploded. That seemed to indicate a stagflationary scenario, reigniting recession fears.
High-multiple tech stocks like Snowflake, Datadog, and HubSpot had already crashed somewhat amid fears of higher interest rates, as the 10-year Treasury bond, often used as a baseline for discount rates on stocks, rocketed from around 1.63% at the beginning of the year to a yearly high of 3.17% in early May. However, with fears that the Federal Reserve will tighten the economy into a recession, the 10-year Treasury yield has actually fallen a bit to 2.83% as of today. That indicates investors see weaker growth and inflation than they did two weeks ago. When long-term bond yields fall, that actually helps these growth stocks, none of which makes material profits today, with most of their profits and cash flows well out into the future.
Ironically, a lower-growth or recessionary environment could actually benefit these three stocks. First of all, they are somewhat insulated from inflationary pressures. Although they have to worry about software engineering salaries and data center costs, they don't have to ship products from here to there like retailers do. Additionally, each will grow, even in a recessionary economy, due to their strong software services and secular tailwinds.
Snowflake grew revenue 101.5% last quarter, as its cloud-based data lake service has proven a key tool in the big data economy. For instance, just yesterday, Snowflake announced a partnership with giant payments company Stripe, allowing retailers to share and integrate their payments data with other industry data to glean powerful insights.
Datadog also reported a very impressive 82.8% growth last quarter, as its software observability services help protect enterprise applications and assist them in running smoothly in the cloud. And HubSpot saw 40.6% growth last quarter, as its digital marketing and customer relationship management suite aid businesses in reaching customers and organizing customer information in the new digital world.
With these stocks down so much already from their highs -- Snowflake is down 64%, Datadog is down 50%, and HubSpot is down 60% -- and with long-term yields falling, these growth stocks are catching a bid today, as investors bottom-fish.
Image source: Getty Images.
Now what
The big question is, have these stocks really bottomed? That's an impossible question to answer. While it could be that these growth stocks are near a bottom, I also wouldn't expect them to get back to their all-time highs anytime soon. The Fed will be raising rates until inflation comes down, and it doesn't appear we are going back to the environment of super-low interest rates and quantitative easing we saw in 2020 and 2021.
Meanwhile, Snowflake still trades at 35 times sales, Datadog still trades at 24 times sales, and HubSpot still trades at 11 times sales. Relative to history, those are still expensive valuations, despite how far these stocks have fallen.
While young, very-long-term-oriented investors may think about taking a position here, investors should still leave open the possibility of more declines, or lackluster returns, in the near term. One day does not make a trend.
