What happened
The broader market indexes were mixed on Tuesday, as investors focused on the ongoing macroeconomic headwinds and what it meant for the Federal Reserve's ongoing battle to tame inflation. The latest U.S. government data reveled that while that inflation cooled somewhat last month, it was still higher than expected.
With that as a backdrop, shares of Datadog (DDOG 3.58%) jumped 2.9%, Atlassian (TEAM 2.66%) rose 2.9%, and Zscaler (ZS 3.48%) climbed 0.9%, as of 2:30 p.m. ET.
While one stock had some company-specific news, the move was muted, suggesting that investors were primarily focused on the mixed economic data.
Image source: Getty Images.
So what
The U.S. Bureau of Labor Statistics released its monthly inflation data for January, and the reception was mixed. The Consumer Price Index (CPI), the most widely followed measure of inflation, rose 6.4% in January compared to the year-ago period, while edging 0.5% month over month.
While still historically high, inflation actually improved compared to December's read of 6.5%, while also notching its seventh-consecutive month of declines in the annual inflation rate. Unfortunately, the rate wasn't as low as many hoped and higher than economist's forecasts of 6.2%. The "core" data, which excludes extremely volatile food and energy prices, climbed 5.6% year over year, also ahead of the 5.5% predicted by economists.
The underlying data didn't provide investors with a clear strategy. The food and energy indexes both increased, climbing to 10.1% and 8.7%, respectively, helping illustrate the long road of recovery ahead.
Investors have been hoping the Fed will continue to moderate the pace and tenor of interest rate hikes as inflation improves. Interest rate hikes are the Fed's primary tool in the fight against historically high inflation. When borrowing money becomes more expensive, businesses and consumers alike tend to rein in spending. This, in turn, results in reduced demand, which causes a corresponding decline in prices.
The economy is a complex mechanism, however, so the process can be more art than science, and there's no exact recipe for slowing an overheated economy without pushing the country into recession.
Now what
So what does monthly inflation data have to do with our trio of companies? While the major market indexes have all fallen over the past year, technology stocks have been hit particularly hard. The tech-heavy Nasdaq Composite is still firmly entrenched in bear market territory, down 25% from its peak in late 2021.
Many technology stocks have fallen even further. Datadog, Atlassian, and Zscaler stocks are down 57%, 61%, and 63%, respectively, from their highs before the downturn began.
Data by YCharts
Furthermore, the current macroeconomic environment still presents challenges for these three companies, including:
- Datadog's observability and cloud monitoring services have held up remarkably well, but demand has fallen considerably, as businesses look for ways to cut expenses and preserve precious capital to ride out the downturn.
- Atlassian has also seen demand for its project-tracking and collaboration tools evaporate, as some companies view anything less than mission-critical costs as expendable.
- Zscaler's cloud security platform has also experienced decelerating revenue growth, as some companies are waiting out the downturn before implementing more stringent cybersecurity plans.
There was one piece of company-specific news, specifically regarding Zscaler -- which might explain why it didn't rise as much as its tech brethren. The company announced today that it plans to acquire Canonic Security, a software-as-a-service (SaaS) application security platform, for an undisclosed sum. The move will further expand Zscaler's zero-trust data protection tools while increasing its addressable market. Investors were initially leery about the purchase, reserving judgement pending information about the cost of the acquisition.
For investors, the good news is this: Bear markets tend to take down good and bad companies alike. As a result, each of these stocks are selling for significantly less than at the start of the downturn, making their valuations much more compelling -- though none are cheap when measured using traditional valuation metrics.
Atlassian, Zscaler, and Datadog are currently selling for 11 times, 10 times, and 9 times next year's sales, when a reasonable price-to-sales ratio is between 1 and 2. Investors tend to reward companies with a history of strong growth and robust futures with a premium valuation, however, and these are currently still near their all-time lows.
No one knows for sure when the market will bottom out, but these stocks are cheaper than they've ever been. For investors looking out three to five years and with the stomach for a little volatility, buying shares of these industry leaders now -- while they're on sale -- will seem like a brilliant move down the road.
