What happened
Shares of cloud stocks including Atlassian (TEAM -0.30%), MongoDB (MDB -0.86%), and CrowdStrike (CRWD 0.13%) were all trading higher today, jumping with a broader surge in the market. All three of these stocks trade at high valuations and are barely profitable, making them sensitive to the macroeconomic environment, including interest rates.
There was no significant company-specific news about any of these three stocks today. Rather, the gains in the market seemed to drive an outsize jump in the cloud sector.
Initial unemployment claims ticked up slightly this morning, rising to 225,000 last week from 216,000 the week before. Continuing unemployment claims also rose to 1.71 million, their highest level since February. Those figures offer some evidence that the Fed's efforts to tighten the labor market are bearing some results.
And stocks have a history of gaining this time of year in what's known as a Santa Claus rally. Although that rally has been absent from the previous trading sessions this week, it might just be getting a late start. Low trading volumes during the week between Christmas and New Year's also tend to lead to outsize swings in the market, which could be what's happening today.
As of 2:42 p.m. ET on Thursday, the Nasdaq was up 2.7%. At the same time, Atlassian had gained 5%, MongoDB was up 6.1%, and CrowdStrike was trading 4.7% higher.
Image source: Getty Images.
So what
Besides being cloud software stocks, what Atlassian, MongoDB, and CrowdStrike all have in common is that they trade at high multiples and have fallen sharply this year.
Atlassian, for example, which makes collaboration software like Jira and Trello, has fallen 66% this year, and still trades at a price-to-sales ratio of 10.5. It's unprofitable on the basis of generally accepted accounting principles (GAAP), though solidly profitable on an adjusted basis.
Like other cloud stocks, Atlassian has continued to post solid growth in 2022 with revenue up 31% in its most recent quarter, though the company did acknowledge that macroeconomic headwinds were having an effect.
Management said that it has seen a lower rate of free users converting to paid ones, and also saw slower growth in seat licenses from paid users, which mirrors comments from other cloud companies about slowing sales cycles.
Atlassian does benefit from a diversified customer base since it has roughly 250,000 customers, and said there was no noticeable increase in churn or decrease in usage.
Similarly, MongoDB stock is down 62% this year, but still trades at a price-to-sales (P/S) ratio of 10.8. The company continues to grow at a rapid rate with revenue up 47% and strong performance from Atlas, its cloud-based database-as-a-service product. Sales jumped 61% in the quarter and now make up 63% of total revenue.
MongoDB also impressed investors on the bottom line with an adjusted profit per share of $0.23, against expectations of a loss. And management said that usage trends improved from the second quarter to the third, a positive since the company uses a consumption-based model.
Lastly, CrowdStrike is down 49% this year, and still trades at a P/S ratio of 11.5. The company has established itself as a leader in cloud-based endpoint cybersecurity with its Falcon platform, and it continues to deliver strong growth despite the macro headwinds.
In its third quarter, revenue jumped 53% to $581 million, and the company reported strong free cash flow at $174 million, a company record. CrowdStrike is still losing money on a GAAP basis with the company spending aggressively on share-based compensation, like a lot of software companies.
The company did note that new annual recurring revenue was below expectations, and said it was experiencing lengthening sales cycles with its smaller customers.
Now what
All three of these stocks have been volatile throughout the year and should continue to be sensitive to the macroeconomic environment given their valuations and lack of significant earnings.
The good news for investors heading into 2023 then is that these shares could surge once market sentiment shifts and stocks begin to rebound. But when that happens will depend on a number of factors, including the Federal Reserve's rate hikes.
