What happened
A handful of high-flying tech stocks saw their share prices decimated on Friday even though none of these companies had any market-moving news today.
|
Company |
Business Description |
Lowest Drop on Friday |
|---|---|---|
|
Zoom Video Communications (ZM +1.37%) |
Video-based business communications |
(14.4%) |
|
Fastly, Inc. (FSLY +5.99%) |
Edge cloud computing |
(14.2%) |
|
Redfin (RDFN +0.00%) |
Online real estate services |
(12.8%) |
|
Alteryx (AYX +0.00%) |
Data analytics |
(12.3%) |
So what
The companies above don't have much in common at first glance, but they do share a few interesting properties. All of them are trading at extremely lofty valuations. Fastly and Redfin are unprofitable and can't be measured by profit-based measuring sticks such as price-to-earnings or price-to-free-cash-flow ratios. Alteryx trades at 507 times trailing earnings and Zoom's P/E ratio sits at a nosebleed-inducing 5,000 times adjusted earnings.
Moreover, all four of these stocks have delivered market-crushing returns recently. After Friday's big drops, Zoom and Alteryx still gained 78% and 38% over the last quarter, respectively. Redfin's three-month returns stand at 49% and Fastly lagged behind with a 15% gain over the same period. Mind you, the S&P 500 market barometer fell 3% over the last three months.
These volatile tech stocks were vulnerable to a sharp correction, and investors were ready to slap the "sell" button even if the companies themselves weren't doing anything wrong. The coronavirus outbreak is driving lots of investors away from risky and/or richly valued stocks right now.
These stocks are poised to bounce back with a vengeance. Image source: Getty Images.
Now what
The broad exit from seemingly risky stocks is actually a big mistake. Attentive investors can find lots of high-quality stocks at enticing discounts in market panics like this one, and you should really look into buying the four stocks mentioned above.
You see, they all earned their "lofty" valuations the hard way. Alteryx boosted its sales by 65% last year. Fastly has only grabbed a 1% slice of an $18 billion market so far but it's growing much faster than market-leading rival Akamai Technologies (AKAM +0.32%). Redfin didn't just crush Wall Street's estimates in the fourth quarter, but also posted guidance far ahead of analyst expectations. And Zoom might actually benefit from the virus scare as companies rely on germ-free digital video conferences instead of risky face-to-face meetings.
