What happened
Shares of enterprise software stocks dipped Monday in the wake of last week's rally. Shares of Snowflake (SNOW -1.04%), Datadog (DDOG -1.66%), and Twilio (TWLO -2.12%) were down 2.3%, 2.1%, and 1.9%, respectively, as of the close of trading. The Nasdaq Composite Index fell just 0.7% on the day.
So what
Tech stocks in general took a beating in mid-June after the Federal Reserve hiked its short-term interest rate by 0.75 percentage points -- its largest single-step jump since 1994. In fact, the Fed's aggressive interest rate policy throughout 2022 thus far has been a primary driver of the stock market's decline. Higher interest rates generally lower the present value of risk assets like stocks.
High-growth companies that generate minimal profits (or losses) are particularly susceptible to this interest rate effect. It has therefore been tough going for Snowflake, Datadog, Twilio, and other enterprise cloud software stocks this year.
Data by YCharts.
After sliding following the Fed's last rate hike, though, all three of these stocks rebounded in the second half of June. However, that may have been nothing more than a bear market rally -- a temporary bounce that will be followed by an even deeper decline. After all, the Federal Open Market Committee will meet again at the end of July and in late September, and additional rate increases are expected after both of those meetings as the central bank continues its battle against high inflation. For better or worse, more stock market turbulence is likely ahead.
Now what
Despite the uncertainty about where inflation is headed, the precise path the Fed will follow in its rate hikes, and the possibility that a recession will result from the Fed's fiscal tightening, Snowflake, Datadog, and Twilio continue to perform quite well as businesses. Organizations around the globe are rapidly shifting to the use of cloud computing infrastructure, and this IT transformation is yielding cost savings and giving management teams greater insight into their companies' day-to-day business.
Each of these cloud players reported strong revenue growth in their latest quarters: Snowflake expanded at an 84% pace, Datadog rose by 83%, and Twilio's top line increased by 48%.
These cloud software leaders have promising futures, and if you're a long-term investor, nibbling on stocks like Snowflake, Datadog, and Twilio right now could pay off big years from now. For the time being, though, the market is hyperfocused on interest rates and inflation. Expect more volatility ahead.
