What happened
Tech stocks had a good day on Thursday as investors start to get more bullish on the industry's future. The Nasdaq Composite was up 0.9% at 2:20 p.m. ET, outpacing the Dow Jones Industrial Average and S&P 500 by a wide margin.
Shares of business-to-business software-as-a-service companies were some of the biggest winners. MongoDB (MDB 0.81%) jumped as much as 9%, Atlassian (TEAM -0.22%) was up 10.3% at its peak, Datadog (DDOG 0.50%) was up 10.2%, HubSpot (HUBS -0.01%) rose 6.6%, and Wix.com (WIX -2.00%) popped 5.4%. Shares of each stock have pulled back slightly from their morning peak, but are still up big on the day.
So what
There's generally a "risk on" trade going on today, which is helping high-volatility stocks like these broadly. But there's some positive news in the industry as well. MongoDB reported earnings on Tuesday and revenue was up 47% in the quarter to $333.6 million, a sign that business customers are still increasing spending. But the company did lose $84.8 million, or $1.23 per share, so financials aren't where they need to be long term.
I see two trends that investors are looking at from tech stocks that's likely helping the market. One is that growth seems to be reasonably strong from recent earnings reports like MongoDB's. That's an indication that the market's reaction to both higher interest rates and recession fears may be overdone.
We have also seen many tech companies cut back on staff as investors demand better profitability. That may be something traders are speculating on today. MongoDB isn't doing that and has actually announced hiring plans, but the theme is still consistent. If companies can grow as they cut costs, it'll be good for the bottom line and stock prices long term.
You can see below that all five of these companies could use a little cost reduction to turn their losses into profits.
MDB Net Income (TTM) data by YCharts
Now what
Most tech stocks have been hammered this year, and it's not unusual to have big pops periodically on a piece of good news or speculation that the future is looking better than expected. But investors shouldn't get over excited about today's move.
You can see from the chart above that these five companies all have huge losses, and that's going to hang on their businesses even if revenue keeps growing. This is the balance growth stock investors need to consider heading into 2023.
It's very possible the drop in stock prices over the past year was overdone and tech stocks are on their way higher. But I think we will need to see more evidence that both revenue is growing and profitability it getting closer before this move will be sustainable. Stocks are up today, but the bottom line hasn't gotten any better, yet.
