Earnings matter. And even for growth stocks, valuations matter, too. If it wasn’t clear before this week’s big drops and roller-coaster volatility in technology stocks, it should be now.
The Nasdaq index is down 15% from its November peak, pummeling the stock prices of tech behemoths from Tesla to Apple by double digits. Some of the biggest losers have fallen 40% or 50%, or more from their highs as investors awaited today’s statement from the Federal Reserve about higher interest rates.
Calling a bottom in the market is generally a fools’ game, especially in a market this volatile that has traded at such a premium for so long. But with earnings season for technology stocks going into full swing, following Microsoft’s earnings announcement on Tuesday after the market close (it beat analyst expectations), investors should soon have more clarity. Tesla is set to announce later today, Apple is expected to follow on Thursday, and the earnings parade will continue next week.
“We believe the selloff has taken the froth out of the market, but it’s also translated into some oversold tech stocks,” says Dan Ives, an equity analyst at Wedbush Securities. “That’s why we have the biggest tech earnings season in 10 years.”
We searched FactSet for U.S. tech stocks with market caps of $5 billion or more that bore the brunt of investors’ disillusionment, either through tanking stock prices since Nasdaq peaked on November 19 or through high short interest as investors bet their stocks would go down further. Topping the list: Self-driving tech pioneer Aurora Innovation, which went public in SPAC deal last November and has seen its shares fall more than 70% from their peak.
Also hammered: Asana, the work-management software firm started by Facebook founder Dustin Moskovitz, which is down more than 60% from the peak; Block, the company formerly known as Square, which has declined nearly 50% as it’s faced a revenue slowdown and volatility while pursuing founder Jack Dorsey’s crypto currency strategy; and trading-platform Robinhood, which once rode the wave of fast traders, meme stocks and cryptocurrency but has seen its shares slump more than 50% as revenue dropped in the second quarter.
As the market recovered Wednesday, with Nasdaq rising 1% by late afternoon, many of the worst-hit had ticked higher. Block and Asana were up, despite their red ink. So, too, was Microsoft. While the era of growth stocks clearly isn’t over, as Jefferies analyst Brent Thill argues in a recent report, for software companies stocks with higher multiples, including Snowflake and Datadog, “may be most at risk in a continued downdraft.”
Ultimately, Ives argues, investors will differentiate among stocks whose shares deserve higher valuations (like Microsoft and Apple) and those that don’t (many of the work-from-home names like Zoom and Netflix that soared during the pandemic). “It’s going to be a bumpy month ahead,” he says. “But we believe we’re starting to get into the capitulation stage of some of these stocks that have massively sold off ahead of fundamentals.”