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Why MongoDB, Twilio, and DocuSign Rallied on Monday

What happened

Shares of MongoDB (NASDAQ: MDB), Twilio (NYSE: TWLO), and DocuSign (NASDAQ: DOCU) were up strongly on Monday. Each stock was up between 6% and 9% in early trading, before settling back into a 3.4%, 3.1%, and 4.7% gain, respectively, as of 1:18 p.m. ET.

Many software-as-a-service (SaaS) stocks rose this morning, likely due to two things: a new Federal Reserve survey indicated inflation expectations may be easing, and solid results from another SaaS peer seemed to light a fire under the sector in Monday trading. These two positives were enough to overcome news of a data breach in Twilio's operations.

So what

On Monday morning, the aptly named software company Monday.com posted strong-second quarter results, with revenue up 75%, handily beating analyst expectations, while also raising its full-year guidance. Its stock was up roughly 20%, likely bolstering sentiment for the entire SaaS sector.

Many software names have been beaten down severely over the past nine months amid the dual threats of higher interest rates and a potential growth slowdown. So to see demand for software remaining intact even while other sectors are softening was encouraging.

Perhaps more importantly, there was also some encouraging data on the inflation front. High-growth yet profitless tech stocks have been rather sensitive to inflation numbers this year, as higher inflation implies higher interest rates, which decreases the intrinsic value of cash flows further out in the future.

On Monday, a New York Federal Reserve survey of consumer expectations revealed inflation expectations significantly declined in July relative to June. Consumers now expect 6.2% inflation over the next year and 3.2% over the next three years; that compares with 6.8% and 3.6%, respectively, in June. Remember, since 6.2% inflation would be in the first year, that actually means the 3.2% three-year expectation implies even lower inflation than that for years two and three.

Why are inflation expectations important, as opposed to actual figures? Because expectations of high inflation can actually lead to higher inflation. If employers and workers operate with the mindset of higher inflation, workers will demand more wage increases, which could lead businesses to continue raising prices in what is known as a wage-price spiral. To see expectations coming down was a good thing for these three software stocks.

Unfortunately, Twilio shareholders also received some bad news today at the company level, as management announced in a blog post its IT systems had been breached. A malicious hacker gained unauthorized access to some of Twilio's customers' information, after tricking several Twilio employees into typing in their login credentials to a text alert that looked like it had come from Twilio's IT department, asking them to change their passwords.

Fortunately or unfortunately, the news doesn't seem to be affecting Twilio's stock that much today, as these types of breaches are becoming all too common across corporate America. Aside from the data breach, Twilio may also be bouncing less than the others due to last week's earnings report, in which management issued lighter-than-expected forward guidance.

Now what

Today's rally faded a bit as the news wasn't universally good. Although Monday.com's results trounced expectations, another prominent software leader, Palantir Technologies, delivered lighter-than-expected guidance on its own earnings release, although its reported quarter's revenue did slightly beat expectations.

Moreover, there is more inflation data due out later this week, with the closely watched July consumer price index due out Wednesday morning and the producer price index due out Thursday. Both numbers are expected to show a deceleration from June, given the recent decline in fuel prices; however, with last week's red-hot jobs numbers showing resilience in the economy, it's possible inflation figures could surprise to the upside off of lowered expectations.

While today's action was encouraging, high-growth software stocks are by no means out of the woods just yet.

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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends DocuSign, MongoDB, Palantir Technologies Inc., Twilio, and monday.com Ltd. The Motley Fool recommends the following options: long January 2024 $60 calls on DocuSign. The Motley Fool has a disclosure policy.


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