What happened
A red-hot inflation report from the U.S. Bureau of Labor Statistics burned stock markets on Wednesday, sending the Dow Jones Industrial Average down 1.1% through 10 a.m. ET and the S&P 500 down 1%.
Tech stocks were hit hard early on, with shares of Apple (AAPL 1.27%) losing more than 2% and Nvidia (NVDA -3.33%) and Okta (OKTA -0.65%) falling more than twice that. The good news is that as the morning wore on, the damage lessened. As of 11 a.m. ET, Apple has pared its losses to just 0.3%, while both Nvidia and Okta are back in the green.
So what
What drove these stocks lower -- and why are they back on the rise already?
The first question is easy to answer: Investors reacted to reports that inflation jumped to 9.1% in June -- the highest inflation rate we've seen in 41 years -- by selling off growth stocks on worries that inflation will devalue their profits in future years. Exacerbating the problem, Apple, Nvidia, and Okta all suffered cuts to their price targets on Wall Street this morning.
Citigroup cut its price target on Apple to $175 per share, warning that supply chain snarls continue to hinder production, while on the demand side, "worsening consumer spending" will ding sales.
At Okta, it was Piper Sandler doing the downgrading, with a price target reduction to $130. Despite observing that it delivered "solid" results in its June earnings report, Piper worries that investors may be unwilling to pay up to own Okta shares in the face of a looming recession.
Last and least, Susquehanna Securities cut its price target on Nvidia by a steep 15%, to $220 per share, on the theory that weaker GPU prices will hurt profits at the semiconductor giant. Susquehanna also warned that chip inventories among Nvidia's customers appear higher than previously thought, which could limit demand for new chips, hurting sales in the short term.
Now what
But here's the good news: Despite each of these three tech stocks getting its price target cut, all three of these analysts continue to recommend buying the shares that they cut. For Apple, Citi maintains a buy rating; for Okta, Piper still says "overweight"; and, despite its concerns, Susquehanna says it remains "positive" on Nvidia as a long-term holding. And not to put too fine a point on it, but Apple at $145 a share still leaves the potential for a 20% profit if it hits Citi's price target; Okta would need to rise 33% to reach Piper's target of $130; and for Nvidia to go to $220, it would need to rise a staggering 44%!
So if you're wondering why these three tech stocks bounced right back after their early-morning sell-offs -- there's your reason right there.
It's also worth pointing out that two of the three stocks (Apple and Nvidia) remain profitable. Neither is particularly cheap, however, with Apple's 24 P/E ratio valuing it at a PEG ratio of more than 2.0 based on 11% long-term forecast earnings growth rates and Nvidia nearly as pricey at 42 times earnings and a 21% projected growth rate. They're still better bargains than Okta, however, which not only has no profits today but isn't expected to earn its first profit before 2028, according to forecasts collated by S&P Global Market Intelligence.
In short: If you're looking to follow Wall Street's recommendations and buy these stocks despite their lower expected profits and high valuations, stick with Apple or Nvidia and limit your risk.
