(Bloomberg)-Two software companies are reminding investors what they have long liked about the high-flying sector being hit by rate-spurred market rotation.
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Twilio Inc is both rising. and Datadog Inc. on Thursday after losses in the company’s earnings underpinned the industry’s promise of growth in a more digital world. The results came after similarly strong copy from players large and small, including Microsoft Corp. ServiceNow Inc. and Atlassian Corp.
Twilio, which specializes in communications software, gained up 16% and is on track for its highest closing in about a month where analysts are broadly positive on the stock. Datadog jumped up 19%, and is now up more than 40% from a low hit late last month. The cloud-security software company’s report was found to be strong, pointing to an acceleration in revenue.
Both reports “should bring consumers and more 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 rose approximately 11% to its low hit in late January, although it remains 18% below the peak hit in November. The exchange-traded fund fell 0.2% on Thursday, with positive results retrieving higher-than-expected inflation readings. That inflation report contributed to the 10-year Treasury yield topping 2%, its highest since 2019. Concerns over higher interest rates have forced the group in recent weeks.
Software reports have not been equally strong this season. Earlier this week, Avaya Holdings crashed after its forecast was lower than expected, as did New Relic in the wake of its own guidance. Overall, however, nearly 82% of software companies in the S&P 500 index reported so far this season beating earnings expectations, according to data compiled by Bloomberg. More than 70% lost 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 to 10.9% growth for the overall tech sector, and 8.8% for the S&P 500 Index.
Revenues for the group are expected to grow 14.6%, compared to 6.9% growth for the tech sector and 7.1% growth for the S&P.
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