Why CrowdStrike, MongoDB and Datadog are emerging today

What happened

Cybersecurity Company Stocks CrowdStrike Holdings (CRWD 5.55%)database provider MongoDB (MDB 8.75%)and software observability company data dog (DDOG 10.44%) they were up more than the current market: 4.2%, 6.2%, and 9%, respectively, as of 12:15 pm ET.

There was no major news from these companies today, but many investors may be thinking that these high-growth stocks have bottomed out. Commodity prices and long-term bond yields are falling today, a telltale sign of an economic downturn. However, growth stocks have started to sell off earlier than other cyclical stocks, and their recurring earnings and secular growth prospects may make them more attractive in a downturn. That means these types of growth stocks could bottom out before the market, although that’s a big handicap.

Also, another best-in-class enterprise software stock saw a big update today, perhaps fueling excitement for the software-as-a-service sector.

And that

On Thursday, oil prices fell again, continuing last week’s trend; Meanwhile, long-term bond yields, as indicated by the 10-year Treasury yield, also fell again, to 3.04% as of this writing. That is significantly down from the 3.48% high reached just 10 days ago.

These declines could be signs of an upcoming recession, which may confuse some investors as to why some stocks are rising. The irony is that for high-growth software stocks that are buoyed by long-term secular tailwinds, their value may be determined more by long-term interest rates than the short-term economic outlook. This is because while growth may be lower than normal in a recession, these stocks will in all likelihood continue to grow during a recession, when the most economically sensitive stocks will see significant declines in earnings.

So regardless of whether we have a recession next year, most of the value of these growth stocks is based on earnings in the distant future, maybe 10 years, after the recession ends. Meanwhile, lower long-term rates mean a lower discount rate on those future earnings, and thus a higher intrinsic value.

Also helping things today was a big analyst update to the data lake software. Snowflake (SNOW 12.37%) from JP Morgan analyst Mark Murphy. The analyst surveyed top CIOs on which services they were going to buy the most this year, and Snowflake came out on top. “Snowflake enjoys an excellent standing with clients, as evidenced in our client interviews…and recently presented a clear long-term vision at its Investor Day in Las Vegas to solidify its position as an emerging platform layer critique of the enterprise software stack”. Murphy wrote. Notably, CrowdStrike also scored highly on that survey.

The positive stories about Snowflake probably helped these stocks because each seems to be a disruptive leader in their respective software niche, as Snowflake is. CrowdStrike seems to be the new provider of choice for cloud-based cybersecurity, MongoDB seems to be revolutionizing the big database market, and Datadog is the fastest growing of these new providers of cloud-based observability solutions.

Now what

Given its highly competitive products that are mission critical to any digital business, regardless of short-term economic numbers, these stocks should grow over the next year and beyond.

The big question about these three stocks comes down to valuation. Datadog is still trading at 26x sales, CrowdStrike is still trading at 24x sales, and MongoDB is still trading at 19x sales. These valuations are well below where they were last November, but are still very high by any measure.

Unfortunately, the short-term outlook for these three stocks will likely be determined by long-term rates and inflation, not fundamentals. If you think long-term rates have peaked, then you may be shopping here. However, if long-term rates and inflation remain higher than in the pre-pandemic and pre-pandemic era, there could be more downside ahead. At this time, these stocks are only appropriate for growth investors with a very long time horizon, and not for older investors nearing retirement. These are certainly exciting companies, but their valuations still make them risky, even after today’s positive action.

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