What happened
Shares of MongoDB (MDB -1.39%), CrowdStrike Holdings (CRWD -3.09%), and Datadog (DDOG -1.32%) were rising strongly on Tuesday, up 9.8%, 2%, and 5.1%, respectively, as of 12:48 p.m. ET. The gains came even as the broader market indexes fell on the back of recession fears.
There wasn't any material company-specific news out of these companies today. Ironically, those very recession fears may actually be helping these types of tech growth stocks at the moment.
So what
Ever since the Federal Reserve hiked the Federal Funds Rate by 75 basis points on June 15, the markets appear to have switched from being worried about inflation to worried about a recession.
Why would recession fears be a good thing for these stocks? A couple of reasons. First, as recession fears have bubbled to the surface, the yield on long-term Treasury Bonds has fallen from decade-long highs reached in June. The 10-year Treasury bond yield fell again today to below 2.8%, down 20% from its June 14 highs. Oil prices, which have been a key component of inflation, are also down big, below $100 per barrel for the first time since late April and early May.
Lower long-term yields are generally good for growth stocks that have much of their profits well out into the future. That's because those future profits are discounted by a lower amount, increasing their value, all else being equal.
Meanwhile, the revenue trajectory for these enterprise software-as-a-service (SaaS) companies is likely to hold up much better in a soft economy than more cyclical companies. Within software-as-a-service, these three names are also showing market leadership, high adoption, and very high growth rates.
MongoDB is fast becoming the preferred go-to provider of modern document-style databases, which organize data in a much more flexible way than the traditional row-and-column format of SQL databases. Cybersecurity is also top of mind for every company and government worldwide, especially on news of a massive hack out of China this past weekend, in which the information of 1 billion Chinese citizens appeared for purchase on the dark web. These concerns should benefit CrowdStrike for years to come, as its cloud and artificial intelligence (AI)-based threat detection system is gaining leadership as the new up-and-coming cybersecurity model.
Also related to security, cloud observability company Datadog is growing the fastest out of these three names, with 83% revenue growth last quarter, and even posting a net profit according to generally accepted accounting principles (GAAP) -- albeit a small one. Datadog's observability platform allows companies to monitor, assess, and quickly fix any performance or security problems across their information technology systems and software applications.
The point is, the long-term growth of these names is not really in question today, but rather their valuations. MongoDB and Datadog are down nearly 50% this year, which is likely why they are up strongly today as yields have come down. CrowdStrike is only down 12.5%, as cybersecurity seems to be viewed more favorably, even in a higher-rate environment.
MDB PS Ratio data by YCharts
Now what
While long-term investors tend to focus on company quality and long-term growth, this year's stock market moves have been all about inflation, interest rates, and the broader macroeconomic picture. However, over the long run, the outcome of these three high-quality names won't be determined by Federal Reserve Chair Jerome Powell, but rather their respective competitive advantages, management capital allocation, and growth and profits.
One lingering concern I have with these three names is their valuation, even as rates come down. Although each has a very strong outlook, all three still trade at high price-to-sales ratios by historical standards, ranging between 20 and 29. That doesn't leave much margin of safety at these prices.
So, while these stocks may find a floor soon, it is still going to take a while for them to grow into these valuations. Therefore, this group of software disruptors is only appropriate for younger investors with a very long time horizon, or the high-growth portion of a diversified portfolio.
