What happened
After rising modestly on Wednesday, tech stocks are giving back all their gains Thursday -- and more -- as the Nasdaq slumps more than 1% in early afternoon trading. Within the tech sector, shares of Shopify (SHOP 1.03%), Palantir Technologies (PLTR -2.60%), and CrowdStrike (CRWD -1.82%) are suffering worse than most, falling 3.3%, 3.9%, and 8%, respectively, through 12:05 p.m. ET.
You can blame investment bank Jefferies for that -- and Piper Sandler, too.
So what
Jefferies started off the new year with a series of downgrades, reversing its buy ratings and lowering Shopify, Palantir, and CrowdStrike to neutral, as ratings-watcher The Fly reports today. (Adding insult to injury, both Piper Sandler and Stifel Nicolaus also cut their price targets on CrowdStrike today. The fact that three separate analysts dissed the stock on the same day seems to be weighing especially heavily on CrowdStrike.)
Jefferies is warning of a significant slowdown in the economy in the first half of 2023, and warning, too, that this will significantly impact on tech stocks. In the case of Shopify in particular, Jefferies worries that "massive" capital spending will burden the company in early 2023, depressing profits and making Shopify stock unpopular among investors. The analyst still sees good long-term prospects for Shopify -- but advises investors avoid the name until the back half of the year.
Turning next to Palantir, Jefferies has a "mixed to negative outlook" as growth slows in the first couple of quarters, and investors respond by paying lower multiples to sales and earnings. Jefferies doesn't see the software market picking back up until 2024 -- which isn't great news. The good news, though, is that Jefferies believes investors, too, will predict this 2024 recovery, and begin paying higher multiples to sales and earnings in the second half of 2023, ahead of the actual recovery.
Last but not least, CrowdStrike. Jefferies actually has little that's not nice to say about CrowdStrike, warning mainly that the cybersecurity market in general will be a tough one in 2023. That being said, Jefferies expects CrowdStrike to fare better than other names in this sector, to take market share from its rivals, and to beat consensus estimates. The analyst's main concern about CrowdStrike seems to be that, after beating analyst expectations in every quarter for the past four straight years, CrowdStrike might continue beating expectations -- but by smaller margins -- in 2023.
Now what
As bad news goes, I'd say that actually wouldn't be so horrible for CrowdStrike -- assuming Jefferies is right, of course. Consider that most analysts think CrowdStrike will earn twice as much in the first quarter of 2023 ($0.43 per share), as it was supposed to earn in the first quarter of 2022 ($0.20 per share) -- and 43% more than it actually did earn that quarter ($0.30 per share).
If CrowdStrike beats these expectations by any amount in 2023, it will demonstrate pretty impressive growth for the company. Even at a valuation of 39 times free cash flow, an earnings beat would argue in favor of CrowdStrike still being fairly priced, or even cheap.
And Shopify? Palantir?
I wish I could be as sanguine about these other stocks, but the fact is that Jefferies is probably right to worry about them. Unprofitable and burning cash for the first time in five years, Shopify stock really doesn't appeal to me right now at any growth rate. And as for Palantir, while the company does have positive trailing free cash flow (FCF) of $197 million to its credit, its valuation is a steep 69.5 times FCF. With a projected long-term growth rate of only 27%, there's still too much risk in Palantir's valuation to justify a buy here.
Long story short, of the three stocks Jefferies downgraded today, CrowdStrike still looks like the closest thing to a bargain.
