Why Snowflake, Datadog and Twilio enterprise software stocks fell 2% today

What happened

Shares of enterprise software stocks fell on Monday in the wake of last week’s rally. Shares of Snowflake (SNOW -2.23%), Datadog (DDOG -2.12%)and Twilio (TWLO -1.93%) were down 2.3%, 2.1% and 1.9%, respectively, at the close of trading. The Nasdaq Composite Index fell just 0.7% on the day.

So what

Tech stocks in general took a beating in mid-June after the Federal Reserve raised its short-term interest rate by 0.75 percentage points — its biggest single-step jump since 1994. In fact, the Fed’s aggressive interest rate policy throughout 2022 so far has been a key driver of the stock market decline. Higher interest rates generally reduce the present value of risky assets like stocks.

High-growth companies that generate minimal profits (or losses) are particularly sensitive to this interest rate effect. So it’s been tough for Snowflake, Datadog, Twilio and other enterprise cloud software stocks this year.

Data by YCharts.

After slipping following the Fed’s latest rate hike, all three stocks rebounded in the second half of June. However, this may have been nothing more than a bear market rally – a temporary bounce that will be followed by an even deeper decline. After all, the Federal Open Market Committee will meet again in late July and late September, and further rate hikes are expected after those two meetings as the central bank continues its battle against high inflation. For better or worse, more market turbulence is likely.

Now what

Despite uncertainty about the direction of inflation, the clear path the Fed will follow in its rate hikes, and the possibility of a recession resulting from Fed fiscal tightening, Snowflake, Datadog and Twilio continue to perform well in as businesses. Organizations around the world are rapidly adopting cloud computing infrastructure, and this IT transformation is driving cost savings and giving management teams a better understanding of the day-to-day operations of their business.

Each of these cloud players has seen strong revenue growth in their most recent quarters: Snowflake grew at an 84% rate, Datadog grew 83%, and Twilio revenue grew by 48%.

These cloud software leaders have bright futures, and if you’re a long-term investor, snacking on stocks like Snowflake, Datadog, and Twilio right now could pay off big years from now. At the moment, however, the market is hyper-focused on interest rates and inflation. Expect more volatility to come.