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Why Tech Stocks Are Plunging Today

By Jeremy Bowman - Apr 21, 2020 at 1:36PM

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With earnings season on tap, investors are letting some air out of the bubble that's formed in the last few weeks.

What happened

During the market's tumult over the last two months, tech stocks have been a refuge for investors. The tech-heavy Nasdaq has handily outperformed the S&P 500 and the Dow Jones Industrial Average, and investors have generally believed that the tech industry is well positioned to survive and even thrive from the disruptions that the coronavirus pandemic is causing.

Areas like e-commerce, video streaming, and enterprise cloud computing could even benefit, they've argued, from the stay-at-home orders across the U.S. and much of the world. Indeed, Amazon.com and Netflix recently hit all-time highs despite the broad market still trading close to 20% down from its February peak.

Today, however, sentiment around tech stocks suddenly shifted with earnings season just around the corner. The bubble that had accumulated in recent weeks seems to be bursting. There was no direct reason for the sell-off, though there were some contributing factors. Last night, President Trump said he would temporarily suspend all immigration into the U.S. The details of such a ban were unclear, but the move could pose a challenge for tech companies, which rely on talented immigrants to fill their ranks.

Also today, the oil market continued to collapse. That doesn't directly affect tech companies, but threatens to further destabilize the global economy and geopolitics, which could harm high-priced, unprofitable stocks like those in the tech sector, which are usually vulnerable to economic shocks.

As of 12:19 p.m. EDT today, among the tech stocks that were falling were Slack Technologies (WORK), which was down 7.4%; Fortinet (FTNT 1.40%), which was off 9.6%; Appian (APPN -0.47%), which had fallen 8.4%; Talend (TLND), down 10.3%; Alteryx (AYX 2.38%), which had given up 9.9%; and Shopify (SHOP 0.54%), which was down 10.6%. At the same time, the Nasdaq was 3.6% lower.

An investor looking at a stock chart going down

Image source: Getty Images.

So what

All six of these stocks do at least some of their business in the cloud, and these software-as-a-service (SaaS) stocks all trade at high price-to-sales valuations, except for Talend. On a generally accepted accounting principles (GAAP) basis, none are profitable except for Fortinet and Alteryx, and Alteryx still trades at a P/E near 300. In other words, they trade at a high valuations that make them vulnerable in a volatile market

Some of these stocks have been particularly hard for the market to predict during the coronavirus crisis. Shopify shares actually touched an all-time high earlier this morning on enthusiasm about a post last Friday saying the company was seeing a surge in traffic. But that surge has attracted short-sellers, which may have helped push the stock down today as the e-commerce software provider has long been dogged about concerns about its valuation.  

Stocks like cybersecurity specialist Fortinet, on the other hand, may be more durable as it provides a necessary service that businesses can't simply scale back on, even in tough times. 

Still, there are signs that investors are beginning to respond to the disconnect between the tech sector's recent surge and the fallout in the global economy, which will eventually hit even well-insulated cloud stocks. And with earnings season kicking off, the risk of a downside may be greater than the upside potential.

Now what

Netflix is set to report earnings after hours today, and IBM released a middling earnings report last night. Investors may be eager to see how the shutdowns have affected the leading streamer, since that could influence the rest of the sector's performance tomorrow.

Tech stocks have mostly avoided the announcements about withdrawing guidance or tapping liquidity that have been common in areas like retail, restaurants, travel, and manufacturing in recent weeks, but investors still have little clarity on how the industry will be impacted by the coronavirus and the economic shock it's causing. Some areas are likely benefiting from the stay-at-home orders, but a sustained recession would lead to many of these high valuations being slashed. Today, investors seem to think that likelihood has increased.

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Stocks Mentioned

Fortinet, Inc. Stock Quote
Fortinet, Inc.
FTNT
$57.37 (1.40%) $0.79
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$31.41 (0.54%) $0.17
Appian Stock Quote
Appian
APPN
$47.14 (-0.47%) $0.22
Talend Stock Quote
Talend
TLND
Alteryx Stock Quote
Alteryx
AYX
$49.57 (2.38%) $1.15
Slack Technologies, Inc. Stock Quote
Slack Technologies, Inc.
WORK

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

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