What Happened:
Shares of cloud security platform Zscaler (NASDAQ:ZS) jumped 5.2% in the morning session after the latest inflation data from the Bureau of Statistics revealed that US consumer prices rose 3.2% in October, slightly better than the expected 3.3%. That's down from 3.7% in September and a peak of 9.1% in June of last year. Additionally, key categories such as food at home, electricity, and gasoline rose even less than the headline 3.2%. In fact, gas prices decreased year on year. This suggests that inflation is gradually easing, which is positive news for investors and consumers.
The Federal Reserve has been raising interest rates to combat inflation, and the latest data indicates that their efforts may be paying off. However, inflation is still above the Fed's target of 2%. Regardless, the lower-than-expected inflation numbers could give the Fed more room to keep rates lower. As a reminder, lower rates are a tailwind for stock valuations, especially tech companies where the market needs to discount back cash flows further out in the future. After the initial pop the shares cooled down to $186.91, up 4.9% from previous close.
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What is the market telling us:
Zscaler's shares are very volatile and over the last year have had 28 moves greater than 5%. In context of that, today's move is indicating 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 25 days ago, when the company dropped 5.9% on the news that the yield on the benchmark 10-year Treasury bond topped 5% for the first time in over 15 years. Even with relatively decent inflation readings as of late, this could mean higher rates for longer, which would make it more costly for consumers to take out mortgages and hold credit card debt while making it more expensive for businesses to take out bank loans to fund investments and projects. As a reminder, higher rates hurt equity valuations because a company's stock price is essentially the present value of its future cash flows discounted at a discount rate. The higher the prevailing interest rate environment, the higher the discount rate. Additionally, these dynamics are more detrimental for growth stocks (like tech names) as more of the company's value is prescribed to its long-term potential.
Zscaler is up 69.5% since the beginning of the year. Investors who bought $1,000 worth of Zscaler's shares 5 years ago would now be looking at an investment worth $4,658.
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