What happened
Shares of high-growth enterprise-software companies Twilio (TWLO 0.80%), Atlassian (TEAM +2.55%), and Bill.com (BILL +0.34%) surged this week, up 12.9%, 13.5%, and 12%, respectively, through Thursday. Atlassian officially changed its domicile to the United States from the United Kingdom this week, and Twilio announced some illustrious guests for its upcoming SIGNAL developers conference.
However, the synchronous moves more likely had to do with investors latching onto hopes of cooling inflation after several soft economic-data points.
NYSE: TWLO
Key Data Points
So what
On Monday, data-analytics firm Black Knight released its August Mortgage Monitor Report, which showed a second-straight month of declining nationwide housing prices. They're now roughly 2% below their June peak. Then on Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) released by the Bureau of Labor Statistics showed a near 10% drop in the number of job openings.
Taken together, these data points seemed to show a potential softening in two of the biggest pools of inflation: the housing and labor markets. That spurred potential hope that inflation may come down and, therefore, the Federal Reserve may slow its interest-rate hikes sooner than expected. Long-term bond yields fell significantly on Monday and Tuesday, although they stabilized on Wednesday and Thursday.
High-growth, unprofitable software stocks are some of the most sensitive to interest rates, so it's not surprising to see these types of SaaS stocks moving significantly higher this week. Higher interest rates lead investors to discount future earnings by a greater amount, which means the further out a company's profits are, the less they're worth. That compresses valuations for growth stocks, especially unprofitable ones.
Therefore, when inflation expectations and interest rates fall, the opposite tends to happen, and growth stocks may rise, as these three did this week.
|
Company |
Q2 Revenue Growth (YOY) |
Net Income (TTM) |
Price-to-Sales Ratio |
|---|---|---|---|
|
Twilio |
41% |
($1,060 million) |
4.0 |
|
Atlassian |
35.8% |
($614 million) |
21.9 |
|
Bill.com |
155.8% |
($326 million) |
23.9 |
Data source: Yahoo! Finance. YOY= year over year. TTM= trailing 12 months.
In company-specific news, Atlassian completed its redomiciliation to the United States from the United Kingdom this week. Atlassian was founded and headquartered in Sydney, Australia but had its primary listing in London. The company recently decided to form Atlassian Corporation in the U.S., which will be the new primary listing and holding company of the existing Atlassian Corporation Plc.
In a statement, the company stated, "Atlassian believes the redomiciliation into the United States will increase access to a broader set of investors, support inclusion in additional stock indices, improve financial reporting comparability with industry peers, streamline its corporate structure, and provide more flexibility in accessing capital."
Meanwhile, Twilio announced the celebrity guest lineup for its upcoming SIGNAL developer conference in early November. Guests include George and Amal Clooney, tennis star Venus Williams, and a host of other celebrities and customer CEOs.
Now what
Earnings season is coming up, and investors will likely be keen to see how these companies are adjusting to new investor demands for profitability in the age of higher interest rates. Twilio recently announced a major restructuring plan, which will entail laying off 11% of its workforce in an attempt to control costs.
In addition, investors will be monitoring the resilience of revenue growth in a slowing economy. On their second-quarter earnings releases, both Atlassian and Bill.com delivered solid results and forward guidance, showing surprising resilience in a tough macroeconomic environment. While Twilio beat revenue estimates, its forward guidance seemed soft, and its stock has fallen accordingly.
While this week was reason for optimism, much remains unsettled until these companies report and inflation comes down in a convincing way.
