What happened
A broad cross-section of stocks initially roared higher on Wednesday as market watchers fixated on the Federal Reserve Bank's ongoing battle to cool persistent inflation. The latest U.S. government data showed that inflation cooled somewhat last month, which could convince the Fed to alter the pace and tenor of its campaign of interest rate hikes, which are designed to control rising prices. The rally seemed to lose steam as the morning wore on, but a number of technology stocks held on to their gains.
With that as a backdrop, Shopify (SHOP 1.03%) had jumped 6.6%, CrowdStrike (CRWD -1.82%) had climbed 4.7%, and Atlassian (TEAM 0.11%) had risen 2% at 11:15 a.m. ET.
A couple of company-specific pieces of news helped fuel the rally, but most investors were focused on the improving economic outlook.
Image source: Getty Images.
So what
The U.S. Bureau of Labor Statistics released its monthly inflation data for March, and the report held surprisingly good news for consumers and investors alike. The Consumer Price Index, the most widely followed gauge of inflation, rose 5% in March compared to the year-ago period and just 0.1% month over month. This marked the lowest inflation rate in nearly two years.
While ongoing inflation remains historically high, it actually improved measurably compared to February's read of 6% and better than economist's forecasts of 5.1%. The "core" data, which excludes extremely volatile food and energy prices, climbed 5.6% year over year and 0.4% sequentially, both in line with economists' expectations.
Not all the news was positive. This biggest contributor to the overall increase was housing, which increased 8.2% year over year, more than offsetting a decline in the energy index, which declined 3.5%. On a more positive note, the food index was unchanged.
Several improving reads on the economy in recent weeks increase the likelihood that the Fed can ease up on the pace of interest rate hikes sooner than later. The market is widely anticipating a 0.25% increase when policymakers meet again on May 2-3 to decide the near-term future of rate hikes.
The Fed uses interest rates as its primary tool to rein in rising inflation. When it costs more to borrow money, consumers and businesses will likely spend less. This slows demand, which in turn will cause prices to fall. It's important to remember that the economy is a complex mechanism and striking the rate balance to achieve this goal is difficult. The Fed wants to slow an overheated economy without causing growth to screech to a halt, which would ultimately push the economy into recession.
Now what
There was some company-specific news that helped boost one of our trio of stocks, even as the broader market appeared to lose momentum as the morning progressed.
JMP Securities analyst Andrew Boone upgraded Shopify to outperform (buy) from market perform (hold) while assigning a price target of $65. This represents potential upside for investors of 45% compared to Tuesday's closing price.
The analyst posits that Shopify's gross merchandise volume (GMV) guidance is conservative and has upside, while there is "room for greater expense discipline." Spending on the Shopify Fulfillment Network is lower than Wall Street estimated, and the company is gaining traction with larger enterprise businesses. He went further, calling Shopify "the leader in commerce enablement."
On a more general note, the current macroeconomic conditions still present challenges for our trio of companies:
- While inflation continues to abate, it's still historically high, causing consumers to spend less, which will result in fewer e-commerce purchases for digital retailers powered by Shopify's platform.
- While cybersecurity spending has held up well, growth is still slowing for CrowdStrike, and things could worsen if economic conditions deteriorate.
- This also holds true for Atlassian and its project and workflow management products as businesses rein in spending in response to the difficult environment.
For those who like to view the glass as half full, there's good news. Bear markets tend to weigh on good and bad companies alike. As a result, each of these stocks is selling for a significant discount to its peak price in late 2021, making their valuations much more compelling -- though none are cheap in terms of traditional valuation measures.
CrowdStrike, Atlassian, and Shopify are currently selling for 10 times, 8 times, and 7 times next year's sales, respectively, when a reasonable price-to-sales ratio is between 1 and 2. That said, these valuations are near all-time lows, and investors tend to reward companies with a history of strong growth and robust prospects with a premium valuation.
For investors with the appropriate three-to-five-year investing time horizon and a stomach for continuing volatility, buying shares of these technology while they're on sale could seem like a genius move years from now.
