What Happened?
A number of stocks jumped in the afternoon session after falling Treasury yields eased pressure on software stocks as signs of cooler U.S.–China tensions lifted risk appetite.
The benchmark 10-year Treasury yield fell roughly 3 basis points to 4.97%, slipping below the 5% threshold, according to CNBC. A retreat in bond yields provides relief for enterprise software equities, whose valuations are anchored by cash flows projected years into the future.
Separately, attention turned to the U.S.–China summit later in the week, slated to cover trade relations, artificial intelligence cooperation, and other geopolitical issues. The prospect of constructive talks on cross-border trade and technology policy helped ease that uncertainty and lifted risk appetite for software names.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.
Among others, the following stocks were impacted:
- Communications Platform company Twilio (NYSE: TWLO) jumped 6.9%. Is now the time to buy Twilio? Access our full analysis report here, it’s free.
- Cloud Monitoring company Datadog (NASDAQ: DDOG) jumped 4.5%. Is now the time to buy Datadog? Access our full analysis report here, it’s free.
- Design Software company Unity (NYSE: U) jumped 3.5%. Is now the time to buy Unity? Access our full analysis report here, it’s free.
- Network Security company Zscaler (NASDAQ: ZS) jumped 3.6%. Is now the time to buy Zscaler? Access our full analysis report here, it’s free.
- Data Infrastructure company Elastic (NYSE: ESTC) jumped 2%. Is now the time to buy Elastic? Access our full analysis report here, it’s free.
Zooming In On Twilio (TWLO)
Twilio’s shares are very volatile and have had 22 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 18 days ago when the stock gained 5.3% on the news that software equities broadly gained momentum following a pullback in treasury yields and second-quarter financial results from Snowflake. Lower Treasury yields supported the move after Fed Governor Christopher Waller signaled support for keeping rates steady. The 10-year yield fell to 4.756%, while the 2-year yield declined to 4.328%, according to CNBC. Because software valuations are heavily based on cash flows expected years into the future, lower yields reduce the discount rate applied to those earnings and can increase the value investors assign to the group today. Snowflake surged after reporting earnings and increasing its forward outlook, sparking widespread optimism across the enterprise software industry. Taking a closer look at the quarter, SNOW’s revenue reached $1.55 billion, up 35% year on year, driven by product revenue of $1.48 billion, which grew 37%, the company reported in an official press release. The upbeat report bolstered investor sentiment regarding enterprise tech demand and software spending.
Twilio is up 86.6% since the beginning of the year, and at $258.20 per share, it has set a new 52-week high. Despite the year-to-date gain, investors who bought $1,000 worth of Twilio’s shares 5 years ago would now be looking at only $750.37.
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