What happened
Bad news for investors in tech stocks Tuesday: In early afternoon trading, shares of companies both profitable and unprofitable are plummeting on disheartening news about the economy -- and interest rates.
As of 12:10 p.m. ET, shares of e-signature pioneer DocuSign (DOCU 3.12%) are down a big 6.4%, followed by cybersecurity specialist CrowdStrike (CRWD 5.77%) with a loss 5%. For that matter, even the granddaddy of all tech stocks, Google parent Alphabet (GOOG 2.45%)(GOOGL 2.30%), is looking at a 4.6% loss for this day.
NASDAQ: GOOG
Key Data Points
So what
So why are tech stocks selling off? Basically, it's the economy -- and more precisely, the inflation rate. This morning, the U.S. Bureau of Labor Statistics surprised investors with a report that inflation inched up another 0.1% in August, to 8.3% -- instead of falling alongside declining gas prices, as had been expected.
This is bad news for two reasons. First, still-rising inflation increases the chances that the Federal Reserve will hike interest rates at its meeting next week in an effort to cool inflation down. And because higher interest rates make economic activity more expensive, they're expected to be a drag on the economy.
Second, the continued upward trend in inflation means that dollars earned by companies far in the future will be worth less than dollars earned in the here and now. That's a reason to discount the valuations of "growth stocks" -- which is precisely what investors are doing today.
Now what
Now what does this mean for DocuSign, CrowdStrike, and Alphabet in particular? For two of these three, it could be bad news. According to data from S&P Global Market Intelligence, neither DocuSign nor CrowdStrike has ever earned even a quarterly profit, much less one for a full year, and analysts aren't expecting either company to turn consistently profitable before 2026. By that time, any profits they earn will be worth much less than an equivalent profit earned today.
But here's the thing: The one stock out of these three that is profitable today, and quite impressively so, is Alphabet. And at just 20.1 times trailing earnings right now, Alphabet is actually no more expensive than the average stock on the S&P 500, despite boasting significantly better-than-average profit margins, and a better-than-average long-term earnings growth rate (13%).
While there's an argument for why today's inflation data might be bad news for DocuSign and CrowdStrike, therefore, I'm not at all convinced that argument works as a reason to sell Alphabet stock as well. If I were in the market for a stock to buy in the midst of today's tech sell-off -- I think Alphabet would be pretty close to the top of my tech shopping list.
