What happened
Shares of enterprise software companies Datadog (DDOG 0.62%), MongoDB (MDB 0.69%), and HubSpot (HUBS 0.44%) all rallied today, up 6.5%, 9.3%, and 7.2%, respectively, as of 1:21 p.m. ET.
The synchronous move across these software names likely has to do with a decline in long-term bond yields today. Long-term yields hit levels not seen since 2008 last week, but backed off a lot today. A decline in interest rates is great news for unprofitable growth stocks, with the bulk of their profitability out into the future.
So what
There wasn't much in the way of company-specific news today, other than analysts at Jefferies releasing a note maintaining their buy rating on HubSpot, even as they lowered their price target to $400 from $450.
HubSpot trades near $280 today, so that upside is still significant. Still, the across-the-board moves in these software-as-a-service stocks likely points to macroeconomic factors causing today's price moves. Specifically, the 10-year Treasury Bond saw its yield drop from 4.234% yesterday to 4.098% as of this writing.
That's a fairly large drop for a single day's work, and may be reflective of declining inflation expectations. The S&P CoreLogic Case-Shiller 20-city house-price index for August was released today, showing a 1.3% monthly decline in housing prices -- the second straight month of declines. Lower housing prices should eventually feed into lower core inflation, which is why the market may have taken this decline as an optimistic sign inflation would come down in the months ahead.
Datadog, MongoDB, and HubSpot are all fantastically performing businesses, but their relatively high valuations have caused large sell-offs as interest rates have risen. While these stocks wouldn't be immune from recession, it's highly likely their recurring subscription revenues and strong positions in the ongoing digitization of enterprises large and small will keep revenues growing even through a downturn, at least to some extent. Therefore, it's almost as if higher long-term interest rates pose a larger danger to these stocks than recession, which would likely see interest rates fall in response.
Now what
Datadog is actually barely profitable, but none of these stocks really make material profits today. Even after their year-to-date sell-offs, these stocks aren't exactly "cheap," with Datadog at 20 times sales, MongoDB at more than 12 times sales, and HubSpot at nearly nine times sales.
DDOG PS Ratio data by YCharts
This makes all three of these stocks somewhat risky, should anything unforeseen happen with their businesses or interest rates.
While the recent sell-off might make these names enticing for younger, growth-oriented investors who have lots of time to make their principal back in case of further declines, older, more conservative investors should still think carefully before buying these expensive growth names, even though they have come down a lot from their highs.
Further gains may be dependent on interest rates falling back under 3%, and there is still a lot of uncertainty around whether or not that will happen.
