What happened
Shares of enterprise software companies MongoDB (MDB -2.41%), Okta (OKTA -1.79%), and Fastly (FAST 0.10%) rose more than the market today, starting the day up in the high single digits before retreating to lower gains of 2.6%, 3.5%, and 4.1%, respectively, as of 1:25 p.m. ET.
There wasn't much in the way of new news today from any of these companies, but the overall enterprise software sector appears to be gaining favor after nearly a year of brutal declines. Some investors may also be anticipating a recession next year and therefore the end of interest rate increases in the months ahead. Some may believe a slower economy could actually benefit mission-critical enterprise software stocks, which have recurring revenue and long-term growth prospects.
In addition, MongoDB received an upgrade from an analyst today, perhaps adding to its bounce.
So what
Analyst Alex Haissl at Redburn, who had been a pessimist on MongoDB with a "sell" rating, upgraded MongoDB today to a less-antagonistic "neutral" rating. This is likely due to MongoDB's significant fall in price this year as interest rates have risen rapidly, harming the valuation of high-growth stocks.
Of note, Haissl still has fundamental concerns, like the persistent lack of profitability and the uncertainty around what ultimate margins will be. MongoDB is a disruptor in the database market, for sure, but in the tech world, things can change very fast, and incumbents can fight back. Yet with MongoDB's valuation now below the 2020 lows at 11.7 times sales, down from over 45 times sales in 2021, Haissl doesn't see as much downside ahead.
MDB PS Ratio data by YCharts.
Okta, which makes identity-as-a-service software, and Fastly, which makes content management delivery software, have also seen huge declines over the past year. Like MongoDB, each digital-focused company thrived during the pandemic as workers and consumers depended more heavily on fast, secure remote connections. However, as growth has slowed on the other side of economic reopening, and as interest rates have risen, both stocks have plummeted, down 82% and 80%, respectively, over the past year.
After such large declines, it appears investors now believe some of these bombed-out growth stocks have fallen far enough. Long-term bond yields as defined by the 10-year Treasury bond yield, while not declining, seem to be stabilizing around 4%. As long as long-term bond yields don't continue increasing, unprofitable growth stocks could find their footing here.
Now what
Is this recent multi-day rally in growth tech stocks the end of the bear market or just another rally that will fizzle out? It's really impossible to say, as there is so much uncertainty out there around the path of interest rates, geopolitics, and company-specific factors in the fast-changing technology landscape.
After all, just because a stock is down 80% doesn't mean it can't go down 90%, in which case those who bought after an 80% decline would still see a 50% haircut.
On the other hand, the long-term trends toward cloud-based infrastructure and the use of massive amounts of data to inform enterprise decision-making should remain powerful secular forces. While there has been some giveback as the economy has emerged from the pandemic, digitization of the economy should be here to stay.
Therefore, investors may want to start making a list of their favorite tech stocks to buy after the massive sell-off. While many tech stocks never made it back to their prior highs after the dot-com bust, others such as Amazon.com went on to become 100-baggers. While it may or may not be the case for these three stocks, the current tech bust could yield some similar opportunities.
