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Why Many High-Flying Tech Stocks Are Falling Today

By Anders Bylund - Feb 27, 2020 at 12:16PM

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Risk-averse investors are running away from volatile tech stocks due to the coronavirus outbreak. Should you follow them out or take advantage of sudden discounts on high-quality companies?

What happened

Many market-darling tech stocks are taking a deep dive today because of the developing coronavirus outbreak. Social media specialist Snap (SNAP 4.59%) fell as much as 6.6% Thursday morning, while cloud computing expert Fastly (FSLY 10.85%) dropped 10.6% at most. Video content manager Telaria (TLRA) bottomed out at a 12.9% decline.

A young woman wears a breathing mask.

Image source: Getty Images.

So what

The virus weighs heavily on the entire market right now, driving both the S&P 500 and Dow Jones 1.7% lower. High-flying growth stocks are more vulnerable to this market correction, as many investors are fleeing higher-risk investments. Whether they reinvest their assets in more stable companies or keep their cash off the market altogether, these moves are taking a toll on stocks with lofty valuations.

All three of the companies above have optimized their business models for maximum revenue growth. Operating costs such as R&D expenses and heavy sales and marketing pushes often consume those skyrocketing revenues long before reaching the bottom line, resulting in negative earnings. Both Snap and Fastly showed year-over-year sales growth north of 40% in their most recent earnings reports, while Telaria's revenues increased by 23%. Earnings and free cash flows are consistently negative, with the exception of Telaria's cash flows running just above the breakeven line, making it difficult or impossible to determine fair market values based on simple valuation ratios.

As such, these three tech tickers are taking the virus-based market panic on the chin.

Now what

Keep in mind that none of these three tech stocks are particularly vulnerable to a weak Chinese market. They don't mention the Middle Kingdom or trade tariffs in earnings reports or conference calls. The coronavirus could still trip up their sales-growth plans if and when the disease evolves into a global epidemic, but these companies are not standing in the crosshairs of some company-specific or even industry-focused threat.

Furthermore, they all sport lean balance sheets with plenty of cash and low long-term-debt balances. Some fast-growing companies simply must keep growing in order to avoid being crushed by massive interest expenses and burdensome debt covenants. Fastly, Snap, and Telaria have avoided that trap and should be able to coast through even a lengthy downturn by temporarily lowering their R&D and marketing costs.

So if you've been looking for a chance to pick up these high-growth stocks at a discount, this might be it. In particular, Fastly and Telaria strike me as interesting buys on dips like this one.

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Stocks Mentioned

Snap Inc. Stock Quote
Snap Inc.
$14.81 (4.59%) $0.65
Telaria Stock Quote
Fastly, Inc. Stock Quote
Fastly, Inc.
$12.46 (10.85%) $1.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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