What happened
The broader markets slumped today as investors digested the latest unemployment figures. The jobless data suggests that the Federal Reserve Bank's campaign of rising interest rates -- its primary tool for fighting inflation -- may finally be having the desired effect. Unfortunately, it may not be enough to stop the Fed from increasing the pace and tenor of its interest rate hikes.
The news acted to drive down a broad cross-section of stocks, as Shopify (SHOP 0.04%) slipped 0.8%, CrowdStrike (CRWD -1.07%) fell 3.8%, and Roku (ROKU 0.33%) tumbled 4.2% as of 2:55 p.m. ET.
Even as the macro conditions remain uncertain, however, there were positive developments for each company.
Image source: Getty Images.
So what
The weekly unemployment report, courtesy of the U.S. Department of Labor, revealed that initial jobless claims rose by 21,000 to a seasonally adjusted 211,000 for the week ending March 4. This blew past economists' forecasts, which were calling for jobless claims of 195,000, and marked the biggest weekly jump since November 2021. Continuing claims, which accounts for the number of people already collecting unemployment benefits, increased by 69,000, rising to 1.72 million -- the highest reading since December.
Initial unemployment claims, which act as a proxy for job cuts, have remained at or below pre-pandemic levels, despite an increasing number of high-profile employers announcing layoffs.
While the figures are still historically low, the abrupt increase suggests that job seekers are starting to have a tougher time finding employment as market conditions tighten.
Increasing unemployment is normally perceived as bad news -- but we live in extraordinary times. A slowing job market will be a necessary precursor to lowering inflation. The increase in jobless claims could mark a turning point for the overheated economy.
Here's how it works -- at least in theory: When the economy grows too quickly, groceries, fuel, and even housing becomes more expensive, weighing on consumer budgets. The Fed then raises interest rates, which makes borrowing more expensive, causing consumers and businesses to cut back. The shrinking demand eventually causes prices to fall. Unfortunately, since the process is more art than science, it's difficult to gauge how long it will take to lower inflation.
The news of the tightening job market suggests that the Fed's campaign is working, which should be welcome news to our trio of companies. As inflation declines, consumer and business budgets will see much-needed relief, giving them back buying power.
Now what
In spite of the uncertain economic backdrop, there was positive news for each of these companies:
- At the Morgan Stanley Technology, Media & Telecom Conference, Shopify president Harley Finkelstein suggested that the worst may have passed for the e-commerce platform, saying: "The company is great, the product is great, our growth levers we understand well. And I think notwithstanding some of the...reaction to the Q4 print, we were trying to be prudent. And so the business is rocking."
- Roku announced yesterday that Dan Jedda will assume the role of CFO effective May 1, succeeding Steve Louden, who plans to step down this year. Jedda is a former Amazon executive and current Stitch Fix finance chief. Wall Street dislikes uncertainty, so investors were pleased to see this important C-suite position filled by a seasoned executive.
- Roku also announced that beginning today, its new Roku Select and Plus Series TV models will be available at Best Buy, further cementing the company's industry-leading streaming platform.
- Just days ago, cybersecurity specialist CrowdStrike announced the results for its fiscal 2023 fourth quarter, which came in well ahead of expectations. Revenue of $637 million grew 48% year over year, while its adjusted earnings per share (EPS) of $0.47 climbed 57%. This was well ahead of expectations for revenue of $625 million and EPS of $0.43.
The ongoing market downturn has resulted in each of these stocks being cheaper than they have been in some time. Roku is the most obvious bargain of the three, selling for 2 times next year's sales. For context, a reasonable price-to-sales ratio is between 1 and 2.
Shopify and CrowdStrike still have a measure of growth baked into their valuations, each selling for roughly 7 times next year's sales. I would argue, however, that a strong history of growth and future potential make them deserving of a premium.
For investors who plan to hold for three to five years, all three stocks represent a clear buying opportunity.
