What happened
Shares of cybersecurity company CrowdStrike Holdings (CRWD 4.56%), database provider MongoDB (MDB 3.42%), and software observability company Datadog (DDOG 3.72%) were up more than the market today -- up 4.2%, 6.2%, and 9%, respectively, as of 12:15 p.m. ET.
There wasn't any material news out of these companies today, but many investors may be thinking these high-growth stocks have bottomed. Commodity prices and long-term bond yields are falling today, which is a telltale sign of an economic downturn. However, growth stocks began selling off before other cyclical stocks, and their recurring revenue and secular growth prospects may make them more attractive in a downturn. That means these types of growth stocks could bottom before the market -- although that's a big if.
Additionally, another best-in-class enterprise software stock caught a big upgrade today, perhaps boosting enthusiasm for the software-as-a-service sector.
NASDAQ: CRWD
Key Data Points
So what
On Thursday, oil prices fell again, continuing a trend from over the past week; meanwhile, long-term bond yields as denoted by the 10-year Treasury bond yield also fell again, to 3.04% as of this writing. That's significantly below the high of 3.48% hit just 10 days ago.
These declines could be signs of an upcoming recession, which may confuse some investors as to why some stocks are rallying. The irony is that for high-growth software stocks riding long-term secular tailwinds, their value may be more determined by long-term interest rates than the near-term economic picture. This is because, while growth may be lower than normal in a recession, these stocks will still grow in all likelihood during a downturn, when more economically sensitive stocks will see significant declines in earnings.
So, regardless of whether we have a recession in the next year, most of the value in these growth stocks is based on profits far out in the future, maybe 10 years, once the downturn is over. Meanwhile, lower long-term rates mean a lower discount rate on those future earnings, and therefore a higher intrinsic value.
Also helping matters today was a big analyst upgrade for data lake software peer Snowflake (SNOW 4.13%) from J.P. Morgan analyst Mark Murphy. The analyst conducted a survey of major CIOs on what services they were going to buy more of this year, and Snowflake came in first. "Snowflake enjoys excellent standing among customers as evident in our customer interviews...and recently laid out a clear long-term vision at its Investor Day in Las Vegas toward cementing its position as a critical emerging platform layer of the enterprise software stack," Murphy wrote. Of note, CrowdStrike also scored highly in that survey.
The positive notes on Snowflake likely helped these stocks because each appears to be a disruptive leader in its respective software niches, as Snowflake is. CrowdStrike appears to be the preferred new vendor for cloud-based cybersecurity, MongoDB appears to be disrupting the large database market, and Datadog is growing the fastest out of these new cloud-based observability solution providers.
Now what
Given their highly competitive products that are mission critical to any digital enterprise, regardless of the near-term economic numbers, these stocks should grow through the next year and beyond.
The big question on these three stocks comes down to valuation. Datadog still trades at 26 times sales, CrowdStrike still trades at 24 times sales, and MongoDB trades at 19 times sales. These valuations are well below where they were last November, but still very high by any measure.
The near-term outlook for these three stocks will unfortunately likely be determined by long-term rates and inflation, not fundamentals. If you think long-term rates have peaked, then they may be buys here. However, if long-term rates and inflation stay higher than in the pre-pandemic and pandemic era, there could be more downside ahead. Right now, these stocks are only appropriate for growth investors with a very long time horizon, and not for older investors near retirement. These are exciting companies for sure, but their valuations still make them risky, even after today's positive action.
