What happened
Shares of cloud-based enterprise software stocks Datadog (DDOG 0.50%), MongoDB (MDB 0.81%), and Atlassian (TEAM -0.22%), rallied big on Tuesday, up by 10.2%, 6.8%, and 6%, respectively, as of 2:51 p.m. ET.
Their moves higher were likely due to industrywide and macroeconomic forces -- specifically, Tuesday morning's release of the October Producer Price Index report, which showed inflation by that measure was lower than expected. Additionally, some high-profile hedge funds and family offices issued their third-quarter 13F filings this week, and those reports showed some prominent investors have been increasing their positions in software stocks, especially Datadog.
So what
The Producer Price Index (PPI), which measures the wholesale prices that companies are paying for commodities, goods, and services, rose by just 0.2% month over month in October, lower than the 0.4% increase that analysts had expected. That result dovetails nicely with last week's Consumer Price Index (CPI) report, which also came in lower than expected and caused a similar surge in technology stocks following its release.
Thus, October's numbers seem to show that the Federal Reserve is making tangible progress in its fight against inflation. In response to the news, long-term bond yields declined; the 10-year Treasury Bond yield was down by about 9 basis points Tuesday to 3.773% as of this writing, well below its recent peak of 4.333% on Oct. 21.
As software-as-a-service (SaaS) stocks are long-duration assets with the bulk of their earnings and cash flows well out into the future, lower long-term yields enhance their values as well, since lower long-term discount rates boost the value of those future earnings.
In addition, some prominent investors scooped up shares of beaten-down software stocks in the third quarter. Notably, the Duquesne Family Office, run by famous George Soros acolyte Stan Druckenmiller, increased its Datadog position by 164%, making it the family office's eighth-largest position. In addition, Tiger Global Management, a prominent tech-focused hedge fund, increased its Datadog position by 218% last quarter, making it the firm's seventh-largest position. Tiger Global also increased its Atlassian position by 13%, making it the firm's 11th-largest position.
Datadog also saw some recent insider buying, with Director Matthew Jacobson, who is also the general partner at venture capital firm Iconiq Partners, buying some $70 million worth of Datadog stock on behalf of Iconiq on the open market between Nov. 7 and Nov. 9. Disclosures of the trades were made last week and Monday.
Now what
Have these top-of-the-class SaaS stocks bottomed? It's difficult to say. Despite their year-to-date declines, even after today's bounce, Datadog, MongoDB, and Atlassian still trade at 18, 11.5, and 12.5 times sales, respectively.
Those are not exactly cheap valuations, and they leave these all-star growth companies with high bars to clear. If interest rates stay persistently high, they may find clearing them difficult to do.
Still, there is no denying the terrific growth numbers these companies have been putting up lately -- in the third quarter, Datadog grew 61.4% and Atlassian maintained a 31.5% growth rate. MongoDB grew 52.8% in the second quarter -- its third quarter results will likely be reported in early December.
Should the Federal Reserve succeed in bringing inflation back down without causing a severe recession, these companies could have more upside. After all, all of them help their clients become more efficient and productive, which can help enterprises mitigate the impacts of inflation.
Still, investors shouldn't anticipate these stocks making a quick recovery to the all-time highs they touched in 2021, as I don't anticipate that either ultra-low interest rates or the heady growth rates seen during the pandemic digitization push will return anytime soon.
