What happened
The state of the overall economy has clearly been the primary driver of the stock market over the past year or so, as high inflation and the Federal Reserve Bank's campaign of interest rate hikes have taken center stage. Investors are still holding out hope for a so-called "soft landing," with the economy avoiding a recession. The latest read on inflation helped fuel those hopes, sparking a broad market rally.
With that as a backdrop, CrowdStrike (CRWD 0.14%) climbed 2.3%, Cloudflare (NET -1.47%) rose 3.1%, and MongoDB (MDB -2.10%) jumped 5.2%, as of 1:42 p.m. ET on Wednesday.
A check of all the usual sources -- regulatory filings, earnings results, and changes to analysts' targets -- turned up little in the way of company-specific news, driving these cloud stocks higher today. The evidence seems to suggest that most investors are reacting to incremental improvements in the broader economy.
Image source: Getty Images.
So what
The latest monthly report on inflation, courtesy of the U.S. Bureau of Labor Statistics, revealed that prices continued to moderate, a welcome development in the midst of macroeconomic headwinds. The Consumer Price Index (CPI), the most widely watched gauge of inflation, increased 4.9% in April compared to the year-ago period, edging just 0.4% higher month over month.
The results were better than economists' forecast of a year-over-year increase of 5%. The "core" data, which doesn't include volatile food and energy prices, remained stubbornly high, up 5.5% compared to this time last year, and climbing 0.4% sequentially, both in line with economists' expectations.
While still historically high, inflation continues to make incremental improvements since reaching a peak last summer, now hitting its lowest level since April 2021.
The underlying data in the report showed that the news was mixed. While gas prices declined 12% compared to the year-ago period, food prices jumped 7.7%, which continues to keep pressure on cash-strapped consumers.
The Fed has been working feverishly to tamp down rampant inflation, and its efforts seem to be paying off, albeit with modest incremental improvements. The central bank has been walking a tightrope between cooling an overheated economy and slowing growth too much, which would ultimately push the economy into recession. With today's inflation reading, investors decided to view the glass as half-full, hoping that the Fed's balancing act continues to bear fruit.
Now what
The one piece of company-specific news was a positive analyst note regarding CrowdStrike.
Rosenblatt analyst Catharine Trebnick initiated coverage on the stock with a buy rating and $170 price target, which suggests potential upside for investors of about 31%. The analyst cites CrowdStrike's "differentiated cloud-security platform" and is impressed with the company's continued robust top-line growth, which in turn is fueling improving cash flow and operating margins. Trebnick further posits that the evidence suggests CrowdStrike can continue these improvements at scale.
More broadly, the improving climate could provide tailwinds for our threesome of companies, as the digital transformation has taken a back seat to challenging economic conditions. Even incremental improvements could provide a boost. For example:
- While cybersecurity stocks have held up well during the downturn, revenue growth has slowed for both CrowdStrike and Cloudflare. As headwinds abate, businesses will be more willing to ratchet up spending, helping return these companies to historical growth rates.
- The same holds true for MongoDB's cloud-native database offerings. Businesses have been cutting back on discretionary spending, but an improving economy will help loosen the purse strings.
But while investors were more bullish today, the stock market is just one negative report away from additional declines, as the last chapter on this economic story has yet to be written. Considering the state of the economy, it's clear that stock prices will remain volatile for the foreseeable future.
There is, of course, the matter of valuation to consider. While none of these stocks is cheap, all are trading at valuations not seen in years. Cloudflare, CrowdStrike, and MongoDB are currently selling for 15 times, 14 times, and 13 times sales, respectively, when a reasonable price-to-sales ratio is generally between 1 and 2.
That said, valuation shouldn't be considered in a vacuum. Wall Street frequently rewards a company with strong revenue growth and robust future prospects with a premium valuation.
For investors planning to hold their shares for at least three to five years, these stocks represent an intriguing opportunity and could generate impressive gains in the years to come.
