What happened
Stocks bolted out of the gate on Tuesday morning, part of a broad-based rally. Investor enthusiasm helped fuel gains in each of the major market indexes. The downturn that began 12 months ago has punished many stocks, though technology companies have been hit particularly hard.
Wall Street has been bullish over the past week as several economic indicators suggest we may have finally reached a bottom. Positive developments in the geopolitical arena also helped push stocks higher and a bullish take by a Wall Street analyst helped fuel gains for Shopify.
As a result, Shopify (SHOP 5.47%) surged 6.2%, Snowflake (SNOW 3.05%) jumped 4.3%, and Palantir (PLTR 3.27%) gained 3% as of 12:10 p.m. ET.
Image source: Getty Images.
So what
The U.S. Bureau of Labor Statistics released its monthly report on wholesale prices -- one of the key measures of inflation -- and the data was decidedly positive. The Producer Price Index, which tracks the prices of goods and services before they reach consumers, rose 8% in October compared to the year-ago period, while increasing 0.2% sequentially.
This key metric came in lower than the 8.3% year-over-year increase economists had predicted and was also better than the expected 0.4% sequential rise. While the metrics are still near historical highs, this is the second successive report that suggests inflation is finally easing.
Just last week, another closely followed measure -- the Consumer Price Index -- increased 7.7% year over year in October, while increasing 0.4% compared to September. Both measures were lower than economists had expected, which helped fuel last week's rally.
Investors had other reasons to celebrate. President Joe Biden met with Chinese President Xi Jinping, and the leaders agreed to resume talks on a wide range of pressing issues, including economic stability and climate change. The meeting marked a significant easing of tensions between the two countries.
Finally, Shopify was the biggest gainer of the three and got a boost from more than just macroeconomic and geopolitical factors. MoffettNathanson analyst Michael Morton initiated coverage of Shopify with a market perform (hold) rating and $30 price target -- which is below the stock's current price of roughly $40.
However, it was what the analyst had to say that gave investors hope. Morton rejected the bear argument of peak e-commerce penetration, suggesting it will resume its historical rate of growth, providing a significant opportunity for Shopify. Some investors have abandoned the e-commerce stock, fearing its best days are already passed, but the analyst is bullish on Shopify's continued market share gains.
Now what
In recent weeks, investors have been jumping at any chance to buy beaten down stocks on the cheap, which suggests investors believe we may be closer to the bottom than the top. Technology stocks are still firmly entrenched in bear market territory, with the Nasdaq Composite down 29% from its high. However, broad-based market declines -- like we've experienced over the past year -- have historically represented prime opportunities to buy great companies at discounted prices.
These three stocks are solid examples of the uneven impact of a falling market, as Snowflake is down 59%, Shopify has crumbled 76%, and Palantir has cratered 79%, compared to last year's highs.
This might not be the end. Consumers are reining in spending, which doesn't bode well for e-commerce platforms like Shopify, particularly as we enter the holiday shopping season. Businesses are also cutting back where they can, which will likely continue to weigh on data storage and business analytics services offered by Snowflake and Palantir.
It's important to remember that given the ongoing macroeconomic uncertainty, rising interest rates, and historically high inflation, stocks will remain volatile for some time to come and sentiment on Wall Street can shift on a dime. This suggests there will be further significant share price movements -- both up and down -- for Shopify, Snowflake, and Palantir.
On the other hand, the current environment affords investors the opportunity to buy these stocks at multi-year low valuations -- but they're still not for everyone.
Even after the drubbing that occurred over the past year, these stocks aren't cheap in terms of traditional valuation metrics, as Palantir, Shopify, and Snowflake are currently selling for 7 times, 7 times, and 17 times next year's sales, when a "reasonable" price-to-sales ratio is between 1 and 2. However, investors have a long history of assigning premium valuations to high-growth stocks.
That doesn't mean these stocks can't fall further -- they almost certainly will. But for investors with the financial resources and the patience to wait three to five years, these disruptive stocks will likely beat the market over time.
