The markets have been under immense pressure from the start of the current year. For example, the Dow Jones Industrial Average has been down by over 12% from its 52-week high. The geopolitical tension and the inflation fears have contributed to the market’s downfall. The tech stocks have been the worst-hit sector, with Nasdaq-100 falling more than 25% from the 52-week high of 16,764.86.
Why Have Tech Stocks Plunged Massively?
The tech-heavy Nasdaq 100 benchmark index has slumped 25% in 2022, with the investors being concerned about the recession with the rising inflation and higher interest rates. The fall is the biggest since the covid-19 downfall when the same index had lost 28% in a month in 2020. Moreover, the Federal Reserve has raised the interest rates by 50 basis points in the first week of May’2022, and the concerns that similar rate hikes can be seen in the future have contributed to a 10% fall in the index in the three trading sessions following the rate hike.
The iPhone giant Apple Inc. (AAPL) has fallen around 17% from its 52-week high of $182.94. On the other hand, the cybersecurity stocks like Crowdstrike Holdings Inc. (CRWD), Zscaler Inc. (ZS), and Okta Inc. (OKTA) are the worst-hit stocks, falling more than 50 to 60% from their 52-week highs. In addition, the internet giants like Amazon (AMZN) and Alphabet (GOOGL) reported weaker quarterly results than expected and saw the highest monthly drops since the financial crisis of 2008. Alphabet and Amazon tumbled 18% and 23.8%, respectively in April, the biggest monthly fall since 2008. In addition, Amazon saw the slowest growth rates since the 2001 dot-cum bust, and Google missed on its sales and profit, with its YouTube segment seeing the biggest miss. Even the streaming market leader Netflix (NFLX) took a huge nosedive after indicating that it had started loosing some of its subscribers.
What Should Investors Do?
In recent months, the growth tech stocks have suffered due to geopolitical situation, supply chain constraints, and inflation fears as the money seems to shift from growth stocks to safe havens and value stocks. In addition, the investors have become anxious about the future earnings of growth stocks due to higher interest rates.
Overall the market has faced the heat of inflation and rising interest rates. However, the growth and tech stocks have faced the burnt more due to their riskier nature. Overall the market has been in a downtrend for a while now, and it is quite difficult to predict when it will bottom out. Though the operation seems relatively good for some, the overall selling pressure has forced even such companies to tumble. The bull run often follows the market corrections, and those investors looking to wait till the market bottoms out often miss the major upside.
Investors can look to invest in good companies and hold them long-term to ensure good returns. First, however, investors need to understand where they are investing their money, for example, in mature tech companies or unprofitable companies with an expectation of solid growth prospects. Mature tech companies can be evaluated based on their price-to-earnings ratio. The higher multiple indicates the market is placing more reliance on the company’s future earnings growth prospects.
On the other hand, investing in unprofitable companies can prove fatal if one is unsure about the sound growth prospects. The company has to move from losses to profits by reducing expenses and showing signs of upside growth. A good tech investment would be in one that is available at a reasonable valuation and has relatively good growth prospects going ahead. However, if one cannot make a sound investment decision, the safest option would be to invest in exchange-traded funds (ETFs) focusing on tech stocks like the Vanguard Information Technology ETF (VGT) and ARK Innovation ETF (ARKK).
It is important to note that some tech sectors grow at a faster rate than others. The tech sectors like cloud computing, AI, and e-commerce are likely to grow much larger in the future. The growth stocks can be judged based on their sales growth rate. It is easier to increase 25% sales from $20 million than to expand $2 billion sales by the same percentage. However, good growth stocks tend to show fast growth rates as they expand. Some highly priced growth stocks tend to experience high volatility, and the sudden price declines can prove to be painful for investors.
The current market and tech stocks slide down may worry investors, but it can also be used as a good opportunity to spot valuable good tech stocks and hold them with a longer time horizon to generate good returns.