We Think High Growth Stocks Are Getting Ready To Move Up
It's The Funds Rate, Stupid
DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Fundamentals Schmundamentals
In securities markets, fundamentals matter a little, but the cost and availability of money to buy securities matters a lot more. How else can you explain the de-rating of growth stock after growth stock in 2022? Names such as Zscaler ZS 0.00%↑ , Cloudflare NET 0.00%↑ , DataDog DDOG 0.00%↑ and others have all continued to grow well through the market bust, and many have become cashflow positive too. And yet the stocks have been smashed against the rocks. Fundamentals don’t explain the stock price destruction and nor does the increased cost of capital available to these companies - since many don’t need to raise capital, living as they do from the combination of cash generation and the original funds raised at IPO time. No, the major determinant of high beta stock prices is the cost and availability of funds used to take the risk. If funds are widely available and cost nothing, why not risk big? If funds scarce and expensive, you’re likely to be more careful with your money. In the former situation you may buy high growth lossmaking moonshot names; in the latter, well, Exxon XOM 0.00%↑ is looking good, right?
As Fed Funds rates top out and likely start to fall - at least if you ask the futures market it will tell you that, as our Fed expert Yimin Xu posted today, the Fed is likely to cut rates soon - then we expect to see a resurgence in the stock prices of these high beta names, particularly those software stocks that have continued to deliver solid fundamentals all the way through.
DataDog $DDOG is one such example of this. Below we discuss the company’s quarter just printed and its outlook; we also look at the stock chart with our price targets and risk management ideas.
So - let’s start with revenue growth, cashflow, and the longer-term outlook for the company.