What happened
Shares of Snowflake (SNOW 2.53%), Shopify (SHOP -2.37%), and Palantir (PLTR -0.23%) each surged this week, with shares climbing 19.9%, 14.8%, and 14.8%, respectively, by the end of trading on Thursday.
The increase was the result of two things. First, long-term bond yields fell this week, along with commodity prices. These indicators suggest an economic slowing or even a recession, which could mean red-hot inflation could be on the brink of cooling down. An economic slowing is actually somewhat bullish for high-growth stocks like these three since a lower long-term discount rate would benefit stocks with earnings well out into the future.
While lower bond yields helped most growth stocks this week, each of these three companies also received bullish analyst notes, further turbo-charging their share prices.
So what
On Thursday, J.P. Morgan analyst Mark Murphy upgraded Snowflake to a "buy" while maintaining his $165 price target. The upgrade came on the heels of Snowflake shares' recent fall below that target price, as well as J.P. Morgan's annual Chief Investment Officer survey. In that survey, Snowflake ranked first in terms of increased spending intentions over the next year and also first in terms of what products impressed CIOs the most. Murphy commented that he expects Snowflake's red-hot growth to continue and for the company to eventually make good margins. That being said, Snowflake still lost $166 million on its bottom line last quarter alone, so Murphy appears to be implying Snowflake can be profitable in the very long term.
Meanwhile, Palantir also received an upgrade to "buy" and a $13 price target from analysts at Bank of America. That price target is around 50% higher than the stock was trading to begin the week.
Although Palantir has sold off hard this year, as investors have turned away from high-priced growth stocks, analyst Mariana Perez Mora believes the Russia-Ukraine conflict and concerns over China should force countries to invest in their military budgets. Specifically, a focus should be on upgrading technology, where Palantir's data-centric software platform excels. In the note, Perez Mora said, "Data is a strategic asset and national security agencies have to make sure they operationalize it securely to better defend from near peer threats like Russia or China. The recent Russo-Ukraine conflict made clear that time is of the essence and new technologies have to be incorporated as soon as possible."
Finally, Shopify was reiterated as a "buy" from analysts at RBC on Thursday, although RBC did drop its price target from $800 to $700 per share. Still, that's nearly 100% higher than Shopify's current stock price at $363. While RBC admits Shopify's stock could continue to face headwinds from lower e-commerce and goods shopping this year due to the end of the pandemic, the company remains very well positioned over the long term. RBC analysts clearly believe Shopify can monetize its value-added services such as payments and logistics more than it is right now.
Now what
The combination of lower long-term interest rates and these three analyst upgrades provided a much-needed boost for these three former market darlings this week. Yet even after this past week's bounce, these former highfliers are still down between 50% and 76% on the year.
Are these stocks due for their next big rally, or was this week's surge just a dead cat bounce? Really, it's very difficult to tell. While these stocks have come down a lot, none of the three make material profits today, and they still trade at relatively high price-to-sales ratios. Those ratios are far lower than they were at the beginning of the year, but remember, the past few years have seen extremely high valuations for high-growth stocks without any profits. While long-term bond yields came off their multi-year highs this week, it's very unclear if we are going right back to that extremely low-rate, high-multiple regime anytime soon.
Still, each of these companies has proven to be a leader in its respective field, so each of these stocks belongs on your watchlist at the very least. With valuation still very much an open question, interested investors should think about constructing a discounted cash flow model for each in order to test their own assumptions for growth, future profits, and discount rates. Use those assumptions as your north star to buy or not to buy, and not just the fact that these stocks are down so much from their highs.
