Why high-growth tech stocks are falling today

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What happened

Many tech stocks took a haircut on Tuesday as Wall Street turned away from seemingly risky investments in favor of more reasonable value games. Any ticker with a recent history of above-market returns was a good game for a strong correction, including many popular investments in the tech sector.

From 2:35 p.m. EDT, database specialist MongoDB (NASDAQ: MDB) had fallen to 4.8%. Electronic commerce technologist Shopify (NYSE: SHOP) fell by a maximum of 5.9%. Data storage expert Snowflake (NYSE: SNOW) rebounded from 5.5% nadir and media streaming veteran Roku (NASDAQ: ROKU) found support after falling 4.5%. Even powerful Apple (NASDAQ: AAPL) suffered a maximum decline of 2.5%.

Together, the lowest points for this group of five stocks totaled $ 80.6 billion in market value loss today. The funny thing is that none of these fantastic companies did anything wrong. They were punished as a group for the questionable offense of providing strong returns to shareholders over the past few months.

Image source: Getty Images.

So what

The specific details may differ, but the themes are all the same. Here’s what those actions looked like on Monday night:

  • MongoDB had gained 133% in the previous 52 weeks, trading 42 times behind sales with negative profits.
  • Roku recorded an 88% gain over one year. The stock was trading at 196 times earnings and 19 times sales.
  • Shopify had accumulated a 54% return over the same period. The shares were changing hands at 392 times earnings and 47 times sales.
  • Snowflake’s annual gain stopped at 48%. Like MongoDB, this company does not report positive net profits. The stock skyrocketed to 95 times sales.
  • Apple’s annual returns were actually slightly lower than S&P 50035% gain, but the iPhone maker has tripled the broad market’s 5% returns since early June. At 28.5 times earnings and 7 times sales, Apple stocks were straddling growth stocks and value investments.

These combinations of recent gains and soaring valuation ratios set our example for painful corrections today. To be clear, none of the companies listed above had any significant news today.

Now what

The driving force behind Tuesday’s leak of riskier stocks was a booming bond market, where the yield on 10-year Treasuries hit a three-month high of 1.53%. The stock market can be sensitive to large movements in these super-safe returns on investment. Higher bond yields provide value investors with a more reasonable safe haven in times of turmoil.

In turn, the rise in bond rates stems from the idea that the Federal Reserve appears poised to stop pumping billions of dollars into the bond market one day soon. The rise in yields is still below the long-term annual inflation target of 2%, which limits the power of the bond market as a whole. Tuesday’s anti-risk corrections will look tame in comparison if this yield-inflation relationship reverses, which could actually happen when the Fed’s quantitative easing program finally takes its course.

I’m not saying it’s time to sell all the high-risk stocks and put the money back in bonds and gold, but investors should be prepared for a more dramatic drop in the relatively near future. If anything, I might increase my investments in MongoDB and Roku if their stock prices fall for purely economic reasons.

After all, these big companies are poised for long-term success in their chosen industries, regardless of bond yields and inflation rates. In the long run, stock prices are based on trading results, not the availability or lack of investment alternatives.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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