What happened
Cloud software stocks, including Okta (OKTA -0.65%), Zoom Video Communications (ZM 0.05%), and Appian (APPN 0.19%), were falling today after August's inflation reading came in hotter than expected.
The inflation report makes it more likely that the Federal Reserve will raise interest rates by 75 basis points at its meeting next week, which in turn increases the chances of a recession, as the Fed's goal is to bring inflation under control, even if that means cooling off the economy.
Growth stocks like these three tend to be more volatile than the broad market, and investors have turned away from unprofitable stocks like Appian and Okta due to fears of a recession and as rising interest rates have made long-dated earnings less valuable.
As of 12:51 p.m. ET, Okta was down 4.6%, Zoom was off 5.4%, and Appian had lost 5.5%. At the same time, the Nasdaq was down 3.8% while the S&P 500 was off 3%.
So what
Overall inflation was up 8.3% year over year in August, which was down from the 8.5% reading in July but still near 40-year highs. From July to August, prices rose just 0.1%, but that was primarily due to a decline in gasoline prices. Core inflation, which excludes food and energy, rose 0.6%, and the overall numbers were higher than expected.
Okta, Zoom, and Appian aren't directly exposed to inflation in the way that, say, a commodities company is. However, since they all sell to businesses, they are sensitive to the macroeconomic climate, and a number of cloud stocks have already noted macro-level headwinds forming.
Okta, for example, said in its most recent earnings report that sales cycles were starting to lengthen, meaning its customers were becoming more cautious. That was one of the reasons why shares of the cloud identity stock plunged on the report, and part of the reason why the company said it was reevaluating its long-term growth target of $4 billion in revenue by fiscal 2026, which ends in January 2026.
Unlike most of its peers, Zoom is profitable, but its revenue growth has nearly ground to a halt after its blowout growth during the pandemic. Revenue in the most recent quarter grew just 8%, and the company slashed its guidance for the year, due primarily to macroeconomic headwinds, to just 7% revenue growth.
Appian, meanwhile, delivered another round of solid results in its second quarter. The low-code software company said overall revenue was up 33% to $110.1 million. Management said it hadn't seen significant macro headwinds, but the company has been preparing for a recession.
In an earlier interview with The Motley Fool, CEO Matt Calkins said the likelihood of a recession was part of the reason Appian bought a process mining firm, Lana Labs, last year, and that it's prepared a sales pitch centered around cost savings, ROI, and efficiency to deploy in the event of a recession.
Now what
All three of these stocks have fallen sharply since their peaks during the pandemic, even though Okta's and Appian's performance have been steady over the last two years. Zoom's growth, on the other hand, has slowed sharply since the pandemic boom.
In the cloud sector overall, market sentiment has shifted over the last year, and sky-high valuations that had priced stocks like these as high as a price-to-sales ratio of 50 have come crashing down.
If these cloud stocks keep delivering strong top-line growth, they should eventually recover, but for now, they're at the whim of the broader market. If the economy does sink into a recession, expect these stocks to fall even further.
