What happened
Shares of a number of high-growth stocks charged sharply higher Tuesday, following a rally by the broader market indexes. After taking a beating over the past year, investors are wading back into stocks on the chance that the worst of the bear market is behind us.
As a result, CrowdStrike Holdings (CRWD -3.90%) gained 3.6%, Snowflake (SNOW -1.99%) jumped 5.3%, and Datadog (DDOG -3.94%) surged 5.7% as of 2:44 p.m. ET.
Image source: Getty Images.
So what
There was no company-specific news driving CrowdStrike, Snowflake, and Datadog higher today. Instead, it appears that investors were more optimistic about the prospect for the market to notch gains from here and were snatching up shares of beaten-down, high-growth stocks.
The past year has been particularly rough on technology stocks, pushing the tech-heavy Nasdaq Composite down more than 30% from its high reached late last year. Some investors had abandoned high-growth companies, searching for safer places to park their cash until the economic storm has passed. This sent CrowdStrike's stock price tumbling 40%, while Datadog and Snowflake stocks have fallen 51% and 55%, respectively, from their November highs.
Today, the tide appeared to turn, at least temporarily, as the S&P 500 and the Nasdaq gained 2.6% and 2.9%, respectively.
The upbeat sentiment came on the heels of a brutal month for stocks, as the S&P and the Nasdaq lost 12.8% and 13.8%, respectively, during September.
Now what
While Wall Street has been increasingly optimistic in October, market moves driven by fear can turn on a dime -- particularly during a bear market -- which means that there is likely more volatility in store for CrowdStrike, Snowflake, and Datadog shareholders, at least over the short term.
The Federal Reserve has telegraphed its continued commitment to getting inflation under control, which will likely result in rising interest rates well into next year. This could result in further pain for the economy, which could, in turn, hurt this trio of businesses.
CrowdStrike's business depends on companies committing to its endpoint cybersecurity services. If the economy falls further, executives looking to cut costs could skimp on computer and network security. Likewise, businesses could forego Snowflake's data cloud and analytics services, instead hunkering down until the macroeconomic situation stabilizes. Similarly, they could sacrifice Datadog's monitoring and analytics services and hope for the best while they ride out the economic storm.
That said, there are reasons to be optimistic for the future. CrowdStrike grew its revenue by 58% year over year in the second quarter, and much of its sales are subscription based, giving the company a measure of stability. During the same period, Datadog's sales jumped 74%, while Snowflake's revenue jumped a remarkable 83%. These results suggest that companies are reluctant to cut back on CrowdStrike's, Datadog's, and Snowflake's services, even in the face of economic headwinds.
Given how far their share prices have fallen over the preceding 12 months, now is the best time in years to pick up these high-growth stocks at a discount. That's not to say that they won't fall lower -- they certainly could. However, each of these stocks is currently trading at or near their lowest valuations in years, providing investors with compelling opportunities.
That said, none of these stocks are cheap in terms of traditional valuation metrics. Snowflake, Datadog, and CrowdStrike stocks are currently selling for 19 times, 14 times, and 13 times next year's sales, when a reasonable price-to-sales ratio is between 1 and 2.
However, given their above-average growth rates -- even in the face of economic headwinds -- I'd argue that each of these stocks is well worth the premium. Furthermore, for investors looking three to five years down the road, buying shares in these innovative, world-class companies while their valuations are near historic lows will seem like a brilliant move, indeed.
