(Bloomberg) — Two software companies are reminding investors what they’ve long liked about the high-flying sector lashed in the rate-spurred market rotation.
Both Twilio Inc. and Datadog Inc. are soaring Thursday after beats on corporate earnings that underly the industry’s promise of growth in an ever-more digital world. The results land in the wake of similarly strong prints from both the big and small players, including Microsoft Corp. ServiceNow Inc. and Atlassian Corp.
Twilio, which specializes in communications software, gained as much as 16% and is on track for its highest close in about a month with analysts widely positive on the stock. Datadog jumped as much as 19%, and is now up more than 40% off a low hit late last month. The cloud-security software company’s report was seen as strong, pointing to an acceleration in profits.
Both reports “should bring buyers and greater confidence back into the SMID cap growth software sector,” wrote Jordan Klein, a managing director and tech analyst at Mizuho Securities.
The iShares Expanded Tech-Software Sector ETF has risen about 11% off a low hit in late January, though it remains 18% below a peak hit in November. The exchange-traded fund dipped 0.2% on Thursday, with the positive results offset by a higher-than-expected read on inflation. That inflation report contributed to the yield on the 10-year Treasury topping 2%, its highest since 2019. Concerns over higher interest rates have pressured the group in recent weeks.
Software reports have not been uniformly strong this season. Earlier this week, Avaya Holdings plummeted after its forecast was below expectations, as did New Relic in the wake of its own guidance. Overall, however, nearly 82% of software companies in the S&P 500 index have have reported so far this season have beaten earnings expectations, according to data compiled by Bloomberg. More than 70% have beaten the consensus in terms of revenue.
According to Bloomberg Intelligence, software and services companies are expected to grow revenue by 13.9% in their 2022 fiscal year, compared with 10.9% growth for the tech sector overall, and 8.8% for the S&P 500 Index.
Earnings for the group are expected to grow 14.6%, compared with 6.9% growth for the tech sector and 7.1% growth for the S&P.
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