What happened
A broad cross section of the stock market tumbled on Wednesday, as investors focused on the macro economy and the Federal Reserve Bank's ongoing campaign to battle runaway inflation, which has remained stubbornly near 40-year highs. The latest Fed rate hike and the corresponding commentary did little to calm jittery investors.
With that as a backdrop, shares of Salesforce (CRM 0.11%) slipped 6.1%, Snowflake (SNOW 0.36%) stock was down 7.4%, and CrowdStrike (CRWD 2.17%) slipped as much as 7.8%. These stocks followed the broader market lower, as the S&P 500 and the Nasdaq Composite declined 2.5% and 3.4%, respectively.
There wasn't much in the way of company-specific news driving the sell-off (more on that later), but fears that the Fed's continued rate hikes might push the economy into a recession was the biggest catalyst that helped push the market lower.
NYSE: CRM
Key Data Points
So what
The Federal Reserve hasn't minced words regarding its plans to aggressively fight inflation, so investors were already factoring in a sizable rate hike by the central bank. That's exactly what they got, as the Fed raised interest rates by 0.75%, the fourth such rate hike since June.
This latest increase brings the federal funds overnight lending rate to a range of 3.75% to 4%, the highest it's been since early 2008. It also marks the sixth increase so far in 2022.
The Fed statement noted: "[R]ecent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low." That said, the Central bank cited a number of inflationary factors, including supply chain restrictions, higher food and energy costs, and broader price pressure.
On a more positive note, however, Fed officials signaled that lower rate hikes might be in store: "In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
NASDAQ: CRWD
Key Data Points
The decision comes in the wake of a report released in mid-October that showed that inflation was higher than anticipated. The Consumer Price Index (CPI), the most widely followed measure of inflation, rose 8.2% year over year, which was worse than the 8.1% increase economists had anticipated.
Now what
There was a common thread that bound our trio of companies together today -- aside from being technology stocks -- and may have had a hand in the stock-price movements. Analysts weighed in on the future potential of each company.
Macquarie analyst Sarah Hindlian-Bowler took over coverage of Salesforce stock, maintaining its outperform (buy) rating and $210 price target -- which represents potential gains for investors of 40%, compared to today's closing price. The analyst suggested that Salesforce is undervalued and anticipates help from the company's cloud suite, which will drive growth and improve margins.
Similarly, Macquarie analyst Frederick Havemeyer initiated coverage of Crowdstrike with an outperform (buy) rating and $220 price target -- representing potential gains of 47%. The analyst cited the company's leading endpoint security platform, expanding product portfolio, and zero-trust stance as "ample growth drivers."
Havemeyer also weighed in on Snowflake, though his view wasn't as bullish. He initiated coverage at neutral (hold) with a $173 price target, or upside of 17% for investors. While he acknowledges Snowflake as a "software winner," his view is tempered by slowing cloud growth and emerging margin pressure.
NYSE: SNOW
Key Data Points
Those opinions aside, with the economy already struggling, many fear the Fed's unyielding rate hikes could push the nation into recession, though the central bankers are trying to straddle the line between controlling inflation and preventing a downturn. The suggestion that rate hikes will continue, albeit with potentially smaller increases, didn't do much to calm already nervous investors.
These factors could weigh heavily on our three companies. Businesses have already been feeling the pinch and are battening down the hatches, reining in spending, and searching their income statements for ways to slash their budgets.
Each of our trio of companies caters to the business crowd. Salesforce provides a customer relationship management (CRM) platform and software. Snowflake offers cloud-based data warehouse and business-analytics services. CrowdStrike provides cloud-centric cybersecurity services. It's easy to envision a scenario where companies could cut back on any or all of these services in order to shore up their war chests for a prolonged economic slump.
Finally, each of these stocks is cheaper than they've been in years, but their valuations aren't for the faint of heart -- with plenty of growth already baked in. Snowflake, CrowdStrike, and Salesforce stocks are currently selling at a respective 15 times, 11 times, and 4 times next-year's sales, when a reasonable price-to-sales ratio is between 1 and 2. That said, for investors who have a stomach for volatility, buying shares in these world-class companies might seem like a brilliant move three to five years from now.
