What happened
Shares of MongoDB (MDB +0.71%), Datadog (DDOG 0.88%), and Appian (APPN +2.66%) surged on Tuesday, rising 8.3%, 6.5%, and 4.8%, respectively, as of 2:50 p.m. ET.
There wasn't any material news out of these companies today; however, most high-growth software stocks surged today after the market fell to yearly lows last week. High-growth names were among the first to fall hard in this marketwide sell-off, so could they be the first to bottom?
In the wake of the Federal Reserve hiking interest rates by 75 basis points last week, the largest increase since 1994, investor attention is now turning away from inflation risks and now more toward recession risk. Ironically, that may actually benefit high-growth enterprise software stocks, on the condition that they continue to grow through a downturn.
NASDAQ: MDB
Key Data Points
So what
Each of these companies is a best-in-class enterprise software company that makes an essential product upon which many modern businesses run. Moreover, their recurring subscription models are attractive during times of economic stress.
MongoDB's document style of database is disrupting the traditional row-and-column format of many traditional databases. As more companies use big data analytics to inform and automate their decision making, the database is the important backbone of that process. Meanwhile, Datadog's observability platform allows companies to extract data from its IT infrastructure and software applications, allowing companies to monitor all of their tech infrastructure easily and quickly fix problems. Finally, Appian provides a low-code platform that allows businesses to create reports and workflows and use data easily. All three have benefited during the pandemic digitization push, in which enterprises scrambled to go digital at an accelerated pace.
Each company is also rated very highly by customers. Appian was just named a "Customer's Choice" and leader in the 2022 Gartner Peer Insights "Voice of the Customer": Enterprise Low-Code Application Platforms Magic Quadrant report. Datadog was also named a leader in the 2022 Gartner Magic Quadrant for Application Performance Monitoring and Observability. And MongoDB has been rated as a leader in Gartner's Magic Quadrant report on Operational Database Management Systems.
So, it's a fair bet that these high-growth companies would continue growing even in a mild recession. Although growth may slow down, MongoDB grew 57% last quarter, Datadog grew 83%, and Appian grew 29%. That leaves a fair amount of headroom for growth even in a slowdown -- especially for Datadog and MongoDB. If a downturn happens, long-term interest rates tend to fall, which benefits long-duration assets such as growth stocks with recurring revenue.
Now what
Oddly, long-term rates as marked by the 10-year-Treasury bond yield actually increased slightly today, to 3.3% as of this writing. Still, the 10-year yield is below last week's highs of 3.48%, which was the highest yield on the 10-year since 2011. So, it's possible bond-market observers are betting a top was put in last week. Since growth stocks are highly sensitive to long-term interest rates, and with these stocks down between 36% and 53% on the year and between 59% and 85% below their all-time highs, investors may be betting a bottom is near.
Still, I wouldn't be so quick to assume these companies have definitely bottomed, even though today's strong action followed a bounce last Friday. Despite their fall over the past year, these three companies still trade at high price-to-sales ratios and have little to no actual net earnings. In the previous low-interest rate regime, these three companies all traded with the expectation that future profits would follow their torrid revenue growth. Now that investors may be looking to see a pathway to long-term profits sooner in a higher-rate environment, they may struggle to satisfy more skeptical investors.
Therefore, those betting on a bottom here may be right, but they could also be very disappointed. Unless long-term interest rates decline and these companies continue to deliver growth at these levels, today's action may be nothing more than a dead cat bounce.
While each of these companies belongs on your watch list due to their sterling product and execution to date, I wouldn't be in a rush to buy shares, unless you are very young, have a long time horizon, and don't mind weathering further significant losses.
