Shares of software leaders CrowdStrike (CRWD +2.13%), MongoDB (MDB +2.00%), and Cloudflare (NET +2.08%) were all down big in Tuesday trading, with each falling over 5% before recovering to a 3.4%, 2.5%, and 2.3% decline, respectively, as of 1:45 p.m. ET.
There wasn't much in the way of company-specific news today, aside from MongoDB making an small $220 million acquisition yesterday. Therefore, the across-the-board declines of even these high-quality software stocks can likely be attributed to some negative macroeconomic news, such as today's consumer sentiment survey.
NASDAQ: CRWD
Key Data Points
Consumer confidence plummets
On Tuesday morning, The Conference Board released its February Consumer Confidence survey with some worrying results. The overall index plunged a whopping 7 points to 98.3, the largest drop since August 2021. The Expectations Index, a component of the overall index that tracks the short-term economic outlook for business and labor conditions, fell 9.3 percentage points to 72.9. Of note, a reading below 80 on the Expectations Index usually signals a recession ahead.
On top of the negative economic outlook, 12-month expectations for inflation increased from 5.2% to 6%. That's perhaps due to President Donald Trump's rhetoric around tariffs at the beginning of the month.
The report dovetailed on last Friday's University of Michigan consumer sentiment survey, which echoed a similar negative reading and sent stocks down sharply last week.
The combination of a recessionary mood and higher inflation could indicate a stagflationary environment, which is really the worst of all possible economic worlds. That's when the economy is in a downturn, yet inflation still remains high. That's what happened in the late 1970s in the U.S. Stagflation is something that leading economists had feared when the Trump administration came into office, given the president's penchant for tariffs and slowing immigration.
A stagflation scenario would be bad for pretty much all stocks, but would really hurt high-multiple growth stocks that are often found in the software sector. Due to the software industry's mostly asset-light businesses, "recurring" subscription models, and high secular growth, these stocks tend to garner high multiples on earnings, if there even are any, as well as sales.
CRWD PS Ratio data by YCharts
CrowdStrike has become the leader in a new generation of cybersecurity stocks, with a disruptive AI-powered platform that appears to be best-in-class in stopping breaches. Even though a botched software update caused worldwide outages last summer, the outage wasn't caused by a breach, and CrowdStrike has bounced back since then.
MongoDB has struggled with slowing growth of late, but its document database architecture is likely to take market share in the massive database industry going forward in the age of AI. Management has said that once AI goes from experimentation to real-world applications, MongoDB stands stands primed to benefit.
Cloudflare is a combination of website content delivery and security in a single, distributed, global platform that has really outdone rivals. Most recently, the stock rose to new heights as the company added artificial intelligence inferencing into its global data center footprint, which is already close to end-customers due to the content delivery business.
But stagflation would really hurt these types of stocks. That's because slower growth could lower the impressive growth rates that have sustained these companies' success to date. Meanwhile, high inflation would increase the discount rate used to value stocks, which would lower the value of future earnings by a disproportionate amount. As high-multiple stocks, the vast majority of these three companies' profits lie well in the future, and those future earnings are given lower valuations in present-day dollars if inflation is high.
But today's report isn't reason to panic
While the past week's consumer sentiment surveys are no doubt reasons for caution, they aren't reasons to panic either. For one, political affiliations may have played a role in the rapid change of sentiment, given that February has been the first full month of the Trump administration. Last week, Fundstrat analyst Tom Lee called the University of Michigan survey "polluted by political affiliations" in that Democratic respondents greatly raised their expectations of inflation, whereas Republicans slightly lowered theirs.
In addition, the 10-year Treasury bond yield actually went down today, not up, falling over 9 basis points to 4.3%.
That could still indicate a weaker economy, but falling long-term bond yields would seem to indicate falling inflation, not rising inflation. So increased inflation expectations may indicate some fears around potential tariffs and not their actual current effects, plus perhaps some other factors such as the recent surge in the price of eggs. But that can be attributed to bird flu, not broader economic imbalances.
Therefore, investors should perhaps take some caution, but not panic, in light of this past week's data. It's no reason to abandon the investing strategy of buying high-quality businesses and holding them for the long term.
