Today's surge in shares for Datadog, CrowdStrike, and Atlassian
Growth in Tech Stocks Amid Moderating Inflation
Growth tech stocks, including SaaS names like Datadog, CrowdStrike, and Atlassian, saw a significant rally on Friday following the release of the February Personal Consumption Expenditures (PCE) report. The report showed year-over-year inflation at 2.6%, slightly above expectations but below last year's levels, suggesting a more stable interest rate environment conducive to growth stocks and technology sector gains.
The "Core PCE" inflation, which excludes volatile food and energy prices, held steady at 2.8%, the highest since February but not dramatically accelerating. This mixed inflation signal suggested that inflation pressure was not spiraling out of control, supporting a market view that the Federal Reserve might pause or slow the pace of further tightening.
The rise in these software stocks may be due to a broader theme related to the PCE report. The American consumer isn't losing purchasing power even as inflation is declining, according to the report. This, combined with ongoing tech sector optimism, fueled the rally in growth-focused SaaS stocks.
Each of these companies is posting impressive top-line growth, beating analyst expectations for both revenue and adjusted profits in their recently reported quarters. However, it's important to note that none of these three companies is making positive profits today. These stocks require strong operational performance to justify their valuations and are appropriate only for those with a long time horizon who can handle near-term volatility.
As of 2 p.m. ET on Friday, shares of Datadog, CrowdStrike, and Atlassian increased by 6.7%, 4%, and 5.3% respectively. Each company is investing in long-term growth opportunities, which could potentially lead to continued earnings growth despite economic uncertainties.
The monthly inflation gauge was below expectations for 0.4%, and the unemployment claims for the week ended March 25 were 198,000, slightly higher than expected. Despite the increase in unemployment claims, the number is still low by historical standards, suggesting more slack may be forming in the labor market.
A "too-hot" jobs market for about 18 months has been a driver of services inflation, but the increase in unemployment claims suggests inflation may decline without a meaningful surge in unemployment. Economywide inflation could hurt the value of these stocks due to higher long-term interest rates. Continued moderation in inflation is necessary for these stocks to maintain their current trajectory.
For those interested in tracking the performance of these stocks, the PS Ratio data for Datadog is available by YCharts. Each stock of these companies trades at frothy multiples between 13.6 and 14.2 times their sales. Investors should keep a close eye on these ratios to gauge the stocks' valuations in the context of their growth prospects.
In conclusion, the subtle inflation signals from the February PCE report provided relief that the Fed might not aggressively tighten further, which combined with ongoing tech sector optimism fueled a rally in growth-focused SaaS stocks like Datadog, CrowdStrike, and Atlassian on that Friday.
- Investors should pay close attention to the stock valuations of Datadog, CrowdStrike, and Atlassian, as each trades at high multiples between 13.6 and 14.2 times their sales, and their growth potential justifies these valuations only if the stocks maintain their current trajectory.
- While the moderating inflation and lower unemployment claims suggest a more stable interest rate environment, economywide inflation could still impact the value of these tech stocks negatively if it escalates, causing an increase in long-term interest rates.
- These tech companies, each with impressive top-line growth, continue to invest in long-term growth opportunities, which could potentially lead to sustained earnings growth despite economic uncertainties, making them suitable only for long-term investors who can handle near-term volatility.
