Cloud Software Stocks Datadog, MongoDB, and DocuSign Fall Amid Banking Crisis

Reversal from Last Week’s Rally

Shares of cloud software stars Datadog (DDOG -3.51%), MongoDB (MDB -4.03%), and DocuSign (DOCU -4.67%) were all falling hard today, down 4.1%, 4.4%, and 4.8%, respectively, as of 2:07 p.m. EDT. The decline marks a reversal from the past week when most high-growth software stocks rallied as the unfolding banking crisis caused short- and long-term yields to fall significantly.

Investors Bet on Stabilization

However, as the U.S. government and large U.S. banks took aggressive action to contain the fallout from the demise of Silicon Valley Bank and other regional banks, and as Europe forced the acquisition of troubled bank Credit Suisse by UBS Group, investors seem to be betting on a stabilization in the financial system and the economy.

Good News for Economy is Bad News for Profit-less Tech Stocks

In a bout of “good news for the economy is bad news for profit-less tech stocks,” long-term yields bounced back higher, which can be a headwind for unprofitable growth stocks even if the economy turns out to be in less bad shape than feared.

Interest Rates are Key Players

A lot of the recent moves in these software-as-a-service (SaaS) stocks really comes down to interest rates. While each of these companies is no doubt seeing a material deceleration in their outlook, each should still grow at a faster pace than the economy over the medium-to-long term, as cloud-based digitization will be an ongoing trend, albeit at a slower pace.

Rotation from Investors

The synchronous moves across all three of these companies therefore likely come from the moves in interest rates and a rotation from investors back into more cyclical sectors like banks, industrials, and energy that sold off hard last week despite much lower valuations.

Unpredictable Future

It remains to be seen whether the banking crisis is in fact fully contained, if a recession will occur, and how severe it will be if it does. Still, it seems like a long shot interest rates will go back to the lows seen in 2020 and 2021 in response to the pandemic, or even back to where they were in the pre-pandemic period.

High Growth Software Stocks in High-Rate Environment

These high-growth software stocks have only really operated in a low-rate environment, and they still aren’t “cheap” by conventional metrics. None of the companies mentioned have generally accepted accounting principles (GAAP) profits today, and at least Datadog and MongoDB still have very high price-to-sales (P/S) ratios of 12.7 and 11.2, respectively. DocuSign is a bit more reasonable at 4.5 times sales, but DocuSign’s new management team only forecasts a tepid 8% growth this year, down from 19% in 2022.

The Motley Fool’s Disclosure Policy

SVB Financial provides credit and banking services to The Motley Fool. Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Datadog, DocuSign, MongoDB, and SVB Financial. The Motley Fool has a disclosure policy.

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Credit: https://www.fool.com/investing/2023/03/20/why-datadog-mongodb-and-docusign-fell-today/

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