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Why Shopify, Palo Alto Networks, and MongoDB Stocks All Rallied on Thursday

By Danny Vena – Dec 1, 2022 at 1:50PM

Key Points

  • An inflation measure that's closely watched by the Fed rose more slowly than expected in October.
  • If inflation is moderating, the Federal Open Market Committee may be inclined to reduce the pace and magnitude of its interest rate increases.
  • Investors celebrated by hunting for beaten-down tech stocks.

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A key economic indicator showed that inflation slowed in October.

What happened

All eyes have been on the economy this year, with investors and consumers alike looking for any indication that things are on the mend. Based on some metrics, the U.S. has already dipped briefly into and come back out of a recession, though economists aren't all in agreement because not all the conditions of a formal recession have occurred. However, a report on a key economic indicator released on Thursday showed that inflation may be slowing, and investors breathed a sigh of relief.

With that as a backdrop for the day's trading session, e-commerce platform Shopify (SHOP 6.16%) climbed 5.5%, cybersecurity specialist Palo Alto Networks (PANW 5.00%) jumped 3.8%, and cloud-centric database provider MongoDB (MDB 6.06%) rallied 3% as of 12:22 p.m. ET.

To be clear, there was little in the way of company-specific news about these businesses. This suggests that investors were relieved that the economy might finally be on the mend, and hoping that the worst of the bear market is behind us.

A smiling person looking at a climbing graph on a computer monitor.

Image source: Getty Images.

So what

The U.S. Bureau of Economic Analysis released its Personal Income and Outlays report for October, and the data was encouraging. The Personal Consumption Expenditures index (PCE), which excludes volatile food and energy prices, rose by 5% year over year, down from its 5.2% increase in September. On a sequential basis, the PCE rose by 0.2% -- lower than the 0.3% increase economists had predicted. 

In a speech Wednesday, Federal Reserve Bank Chair Jerome Powell stressed the importance of the PCE in the central bank's deliberations regarding interest rate increases, so a better-than-expected metric supports Powell's contention that the Fed could slow the pace and tenor of its rate hikes. 

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down," Powell said. "The time for moderating the pace of rate increases may come as soon as the December meeting."

Inflation has been hovering at near 40-year highs, which prompted the central bank to rapidly raise benchmark interest rates to levels not seen since 2008 in a bid to get soaring prices back in check. 

To be clear, while future rate hikes may be smaller, the Fed has signaled it plans to keep rates at their now-higher levels for some time to come.

Now what

There wasn't much in the way of company-specific news, but there was at least one positive development.

Redburn analyst Nina Marques initiated coverage of Palo Alto Networks, starting out with a buy rating and a $270 price target. This bullish estimate suggests roughly 59% gains for investors over the course of the coming year.

Marques views Palo Alto as the leader in its core network security market, and expects it will continue to experience strong demand. Furthermore, she believes Palo Alto can generate both solid growth and free cash flow margins while trading "at an attractive valuation." 

There wasn't any company-specific news for Shopify or MongoDB.

This trio of stocks may be gaining ground Thursday, but the broader market indexes were in the red as of this writing. This suggests that investors are bottom-fishing for tech stocks that have been beaten down over the course of the past year as they look forward to better days ahead. While Palo Alto Networks is down just slightly from where it traded at this time last year, MongoDB and Shopify stocks are down by 68% and 72%, respectively, over the last 12 months.

Sales growth on Shopify's platform has slowed down markedly, but improvements in the overall economy could certainly give it a boost. And businesses have been reining in their spending due to fears of a recession, which has in turn pressured the results of MongoDB and Palo Alto Networks. Better macroeconomic conditions will no doubt loosen the purse strings, providing these companies with greater growth opportunities.

Furthermore, these three stocks' formerly lofty valuations have slid to much more reasonable levels over the past year. But they're still not cheap in terms of traditional valuation metrics. Shopify, MongoDB, and Palo Alto Networks currently trade for 8.2 times, 7 times, and 6.3 times next year's expected sales, respectively, when a reasonable price-to-sales ratio is between 1 and 2. That said, companies with strong histories of growth and clear paths toward more are often awarded premium valuations. 

For investors whose timelines involve holding for three to five years or more, and who have the stomach to handle continued volatility, these market-leading companies -- with valuations at or near their historical lows -- provide clear opportunities to generate impressive gains.

Danny Vena has positions in MongoDB and Shopify and has the following options: long January 2023 $114 calls on Shopify and long January 2023 $116 calls on Shopify. The Motley Fool has positions in and recommends MongoDB, Palo Alto Networks, and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

Stocks Mentioned

Shopify Stock Quote
$43.40 (6.16%) $2.52
Palo Alto Networks Stock Quote
Palo Alto Networks
$178.40 (5.00%) $8.50
MongoDB Stock Quote
$161.94 (6.06%) $9.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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