This year has been a year like no other — and mostly not in a good way. The trifecta of 40-year high inflation, a bear market, and the potential for a recession have weighed on investor sentiment. With so much uncertainty, market watchers have been keeping a weather eye on external factors that might help pave the road to recovery.
With that as a backdrop, a rate decision by the Federal Reserve sparked a rally that swept the major market indexes, helping to drive up beleaguered high-growth cloud computing stocks. Data warehouse and analysis provider Snowflake (SNOW 8.59%) jumped as much as 9.7%, database provider MongoDB (MDB 8.71%) surged as much as 9.7%, and customer relationship management specialist HubSpot (HUBS 8.68%) rose as much as 9.1%. By the end of the day, the trio were still trading higher, up 8.6%, 8.7%, and 8.7%, respectively.
While there was nothing in the way of major company-specific news driving the gains, investors were content to cherry-pick shares of growth stocks that have been beaten down so far this year.
Many investors were expecting a strong rate hike by the Federal Reserve — and they got exactly what they were looking for. In a bid to tame runaway inflation without causing a recession, the central bank raised interest rates by 0.75%, the second such rate hike in as many months. This latest rate hike brings the federal funds rate to between 2.25% and 2.50%, the highest it’s been since mid-2019. It also marks the fourth increase so far in 2022.
In announcing the move, Fed chair Jerome Powell left the door open for another “unusually large” rate increase when the central bank meets again in September. That said, the committee will assess the situation before making any decision.
“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said.
Perhaps more important than the rate hike itself were comments made by Powell regarding the state of the economy. The Fed chief stated that he does not believe that the U.S. is in a recession. “There are just too many areas of the economy performing too well. I would point to the labor market in particular,” Powell said at a press conference following the announcement. From a historical perspective, there tends to be significant job losses when the economy is in recession.
Powell’s pronouncement aside, we’ll have a much clearer picture when the U.S. Bureau of Economic Analysis releases its first-take estimates on gross domestic product (GDP) on Thursday. If the data shows that GDP has contracted, it will mark the second consecutive quarter of declining economic activity, which will meet the historical definition of a recession.
So why does this matter for this trio of cloud stocks? During periods of economic uncertainty, investors tend to flee to safety, foregoing the explosive potential offered by high-growth stocks with frothy valuations in favor of less risky alternatives.
Cloud computing is still a relatively recent development, at least in the grand scheme of things. As such, the digital transformation is ongoing with a long runway of growth ahead. In fact, the global cloud market was valued at roughly $380 billion last year, and is expected to grow more than fourfold to $1.6 trillion by 2030, a compound annual growth rate of more than 17%. Each of these cloud companies is well positioned to help businesses move to the cloud, taking advantage of all it has to offer.
Snowflake’s cloud data warehouse provides companies with the ability to extract meaningful insights from their data. This fueled revenue that surged 84% year over year in the first quarter, while generating strong free cash flow.
HubSpot provides a growing list of cloud-based customer management tools. This drove first-quarter revenue up 41% year over year, while generating adjusted profits and positive free cash flow.
MongoDB’s state-of-the-art database offers cloud storage possibilities that go beyond the traditional rows and columns. In its fiscal third quarter (ended April 30), MongoDB’s revenue jumped 57%, while producing adjusted profits and free cash flow.
Finally, each of these stocks is a bargain, relatively speaking. Snowflake, MongoDB, and HubSpot are currently trading at 22, 16, and 8 times forward sales, respectively. While some view them as still quite expensive, these valuations are near historical lows. Furthermore, given their strong growth and secular tailwinds, some would argue that each is a bargain at current prices.