What happened
Shares of enterprise software companies Snowflake (SNOW -1.21%), Datadog (DDOG -1.20%), and MongoDB (MDB 0.42%) bounced back strong today, up 9.1%, 7%, and 7.2%, respectively, as of 1:35 p.m. ET.
There wasn't much in the way of company-specific news on Monday, as the broader software sector was roaring higher, bouncing back from big declines at the end of last week.
Overall, the macroeconomic picture seemed to improve slightly today, as the United Kingdom's new government announced it would be reversing its prior tax cut plan, which caused chaos in the currency and government bond markets. Long-term U.S. bond yields also retreated slightly, perhaps helping sentiment for high-growth software stocks.
Even though several Wall Street analysts actually cut their price targets on some of these names today, it appears the market was already anticipating such reductions, and the stocks flew higher anyway.
So what
On Monday, several Wall Street analysts lowered their price targets on these software names, though most kept their previous "buy" ratings on these best-of-breed stocks.
Datadog saw price target cuts from analysts at both Mizuho and RBC Capital on Monday, with Mizuho cutting its target from $130 to $108, while RBC cut its price target from $125 to $105. However, both Wall Street firms reiterated their "buy" ratings, as these targets are still much higher than Datadog shares today.
Meanwhile, Morgan Stanley analysts also said in a note that investors had perhaps become too negative on software stocks that have corrected mightily this year, saying a lot of the risks around an economic slowdown, strong dollar, and higher interest rates were "priced in." The analysts pointed to Datadog and MongoDB specifically as being attractive within a broader group of software names.
Also helping matters today was new United Kingdom Finance Minister Jeremy Hunt putting forward a new tax and spending plan, which reversed virtually all the tax cuts proposed by former finance minister Kwasi Kwarteng, who resigned last week. That seemed to reassure markets that the U.K. economy and currency won't spin out of control and likely relieved some currency concerns of a strong dollar relative to European currencies.
Technology stocks are somewhat sensitive to the strong dollar, since many of them have significant international businesses. If the dollar strengthens, tech companies will either have to raise their prices in other currencies or see revenue declines in dollar terms.
Finally, the 10-year Treasury bond yield backed off its recent highs and fell slightly below 4% to 3.99% as of this writing. Although that was just a very small movement, the pause in the 10-year bond yield's rapid rise over the past few months seemed to point to stabilization. The relative action of long-term bond yields can affect unprofitable or low-profit growth stocks, such as these three names, in a big way.
Now what
Investors should expect these types of high-growth but not-profiting enterprise software stocks to remain highly volatile amid rapid changes in interest rates. On the one hand, we could be in a new higher-rate regime relative to the past few years, which could mean these types of stocks will find it harder to rise as their valuations compress, even if their businesses do well.
Even though each stock has come down quite a bit off its highs, each has still made substantial gains since their IPOs over the past few years. MongoDB went public at $24 in late 2017 and trades at $180 today. Datadog went public at $27 in 2019 and now trades at $81. Meanwhile, Snowflake went public at $120 in late 2020 and trades at $166 today.
On the other hand, each of these cloud-native stocks are at the forefront of helping companies use data to make better decisions and drive efficiency, which becomes all the more important amid inflation and other business disruptions from geopolitics.
The increasing use of big data and AI could keep revenue growth intact, even through a softer period for the global economy. Therefore, there will be an interesting dance between rising revenue and concerns over very high valuations if interest rates don't come down from recent heights.
Snowflake at 31 times sales, Datadog at 19 times sales, and MongoDB at 11 times sales are still historically high valuations for companies prior to the zero-interest rate regime of 2020 and 2021, so the hurdles for these companies to clear for their stocks to go up significantly still remains high.
