The Tech Wreck Isn’t Over - InvestingChannel

The Tech Wreck Isn’t Over

Proprietary Data Insights

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Wait For a Bottom

It may be tempting to jump onto Virgin Galactic (SPCE) or Roblox (RBLX), both near all-time lows.

We urge caution and not because they aren’t deals.

Despite what fundamental investors know and believe, markets price in behavior and psychology just as much as a company’s intrinsic value.

How else do you explain the rocket rides of meme stocks, cryptos, and electric vehicle companies that haven’t sold a single unit?

We’re witnessing excess come out of the market. It’s just not as broad as other declines we’ve seen.

Those several big companies that led the market higher, Apple (AAPL), Amazon (AMZN), Microsoft (MSFT) are all still incredibly profitable and reasonably priced given their growth.

That hasn’t stopped companies on the periphery like Fastly (FSLY) and Zoom (ZM) from being murdered.

Just as stocks can get frothy, they can also become incredibly cheap.

But you don’t have to be the first one to grab hold.

Do yourself a favor, make a shopping list of companies you want to own.

Then, wait until the stock chart doesn’t look like it’s pointing straight down. 

At least give shares several weeks to a couple of months of trading sideways until you get some sense that the major selling is over.

There are a couple of profitable companies that we’re watching for such a moment: Zoom Communications (ZM), Etsy (ETSY), Roku (ROKU), Square (SQ), Shopify (SHOP), and PayPal (PYPL).


Why Tech Stocks Aren’t Done Falling

Key Takeaways

  • Tech stocks continue to underperform as investors clamor for corporate profits now as opposed to future growth.
  • Energy, which is experiencing a windfall at the moment from higher commodity prices, is one of the few sectors up this year, and it led last year.

Year to date, the tech heavy Nasdaq 100 (QQQ) is down more than 14%.

The Semiconductor Industry (SMH) flopped more than 15%.

Yet, last year’s winner, energy stocks (XLE) us UP more than 22%.

With shortages of everything, how is this possible?

Heavy Debt Loads

Many tech companies carry heavy amounts of debt. That’s not a problem when rates are low. But as they rise, so do interest payments.

It creates two issues.

First, profit margins decrease as the company spends more money on higher interest payments.

Second, they can’t take on as many projects or investments.

That’s a problem for stocks like Fastly (FSLY) which burned through $113 million in cash last year and spends around $4 million annually in interest. While they have $643 million in cash, they have close to $1 billion in debt coming due in 2025.

A good way to measure this is through to compare the cash generated by a company’s operations to its total debt.

Growth Matters Less

You probably have heard that when you win the lottery you get a choice of a lump sum payment now or payments over 20 years.

The lump sum gives you less total money than the annual payments since taxes would be higher.

However, if interest rates rise, money now becomes more attractive compared to money in the future.

That’s why growth companies, who rely on money in the future, lose value.

Since an investor can earn more on ‘risk free’ investments now, the investor needs a better deal on that same company.

The result – lower share prices.

That’s why we’re seeing technology stocks underperform compared to energy companies that are making a windfall right now.

The Bottom Line: Tech stocks aren’t done repricing (falling). Money continues to move out of high growth sectors into safer ones including consumer staples (XLP) which includes companies like Procter & Gamble (PG) and General Mills (GIS).

As we pointed out in our blog up top, you don’t need to rush into stocks immediately.

Give things time to settle. There are a lot of events that can push equities around from geopolitical conflict to central bank policy. That creates a lot of uncertainty for investors.

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