What happened
The tech-heavy Nasdaq stock index tumbled in early trading Wednesday, before reversing and eking out a small "win" to end the day. Thursday, however, it appears tech stocks will have no such luck. The Nasdaq is already down a big 3.3% in 10:45 a.m. EDT trading, and some individual tech stocks are doing much worse than that:
- E-signature company DocuSign (DOCU 1.02%) is down 14.4%.
- Office messaging specialist Slack Technologies (WORK) is down 8.5%
- Point-of-sale payments facilitator Square (SQ -1.57%) is down 7.3%.
Image source: Getty Images.
So what
None of these three companies joined in the Nasdaq's afternoon rebound yesterday, by the way, and they're falling farther than the average tech stock today as well. What's really surprising about this, though, is that for all three of these stocks, the most recent news we've seen has been of the good variety.
Just yesterday for example, investment bank Baird said it was feeling pretty positive about Slack stock, and reiterated its outperform rating and $37 price target heading into earnings. Whatever nervousness other shareholders may be feeling about Slack, Baird doesn't share the concerns.
Similarly, Wednesday saw analysts at Oppenheimer raise their price target on DocuSign stock by 50%, to $300 a share. As with Baird and Slack, Oppenheimer said it was feeling good heading into DocuSign's second-quarter earnings report, and even thinks investors should consider the e-signature company a "core investment holding," reports TheFly.com.
On Square, you have to look a bit farther back for good news, but just last week, Mizuho Bank initiated coverage of the card payment facilitator with a buy rating and a $225 price target -- predicting that Square's Cash App unit will double its users through 2023, and quadruple its profits.
Now what
Positive analyst comments like Mizuho's, Oppenheimer's, and Baird's are the lifeblood of fast-growing tech stocks like Square, DocuSign, and Slack, helping the companies to sustain P/E valuations that would seem insane for most any other kind of stock on the market -- 278 times expected forward earnings for Square, 454 for DocuSign, and infinity for the still unprofitable Slack.
But revenue growth alone can't justify valuations rising forever if earnings remain low. Without stronger profits to produce more easily justifiable valuations, it seems even positive analyst commentary may not be enough to keep these stock prices growing.
Eventually, gravity will reassert itself -- maybe even today.
