In today’s Exponential Investor:

  • A tech stock crash
  • Does the crash get worse or better?
  • Should I invest in tech stocks now, or sell?

Last year, in 2021, you could pick up some great tech stocks for what seemed like a bargain…

  • Spotify at $305
  • Zoom Video Communications at $404
  • Roku Inc at $490
  • Netflix at $700

At the time the market was full of euphoria. Stocks, in particular tech stocks were going up. It was a seemingly endless rise in the market in high-growth, future-looking tech stocks.

Then the music stopped.

Not only did tech stocks crash, but they were also obliterated.

Today those stocks above can now be bought at the bargain basement prices of…

  • Spotify at $115 – a 62% fall
  • Zoom Video Communications at $110 – a 72% fall
  • Roku Inc at $95 – an 80% fall
  • Netflix at $223 – a 68% fall

This is a small sample of an entire sector that has seen falls anywhere from 50% to 90% (and then some).

It was, and has been, a tough market to deal with.

While things have been brutal from the lofty heights of 2021, it’s not all as bad as it might seem.

However, what people really want to know is…

Will tech stocks crash further?

First, when we say “tech stock” what exactly do we mean? Don’t all companies use “tech” these days?

Well, yes, most of the time they do.

But in terms of the market, tech stocks refer to any stock involved more specifically in the technology sector, from software providers to semiconductor manufacturers and even cryptocurrency-based companies.

As mentioned, tech stocks have crashed really over the last year.

The Nasdaq 100, an index consisting of the largest, most actively traded tech-focused companies, has fallen by 39.5% from its 18 November 2021 high.

The last time we saw a decline this big on the Nasdaq was 2008 as the global financial crisis (GFC) was in full swing.

There are also a lot of indicators that suggest things may fall further. We’re yet to see what many tech companies’ financial year earnings look like as the world’s economies tighten. If earnings disappoint, and global growth slows, we may see reality smack many tech stocks in the face.

Take Roku for instance, it still trades at a price-to-earnings (PE) ratio of around 94-times.

Loosely speaking very high PE ratios can indicate a stock is overvalued relative to its actual earnings. It can also mean the market is pricing in strong future growth… but in a market that’s capitulating, high PE ratios can help indicate there’s more pain to come as valuations revert much closer to what the company actually earns.

Will tech stocks ever recover?

It depends on what you class as “recover”. The Nasdaq 100 index hit all-time highs in early 2000. Then the bubble in technology, media and telecommunications (TMT) stocks (sometimes called dotcom stocks) burst. The market didn’t find its bottom until late 2002… over two years later.

Then, over the next five years, the market more than doubled. Now from the bottom, it would appear that’s a recovery. However, the overall index didn’t surpass the all-time highs from early 2000 until mid 2016!

That’s right, around 16 years after the TMT/dotcom peaks, the market fully recovered.

So recovery is always a tricky word. If you’re looking at an overall index, recovery can be a long time coming. But within a recovery you will also find many points along the way to make money.

The important thing to understand is that in falling markets, rising markets, indeed in all markets, there are ways to make money with smart investments.

Furthermore, over time, regardless of the peaks and troughs of the markets, regardless of crashes and crises, the markets do eventually recover.

When you’ve got a long-term investment time horizon, markets don’t just recover, but they reward in the long run.

While it might be some years away for many companies to recover we expect the market will recover and then go on to new all-time highs.

It should be said, though, that some companies won’t survive at all. There will be companies that fail. There will be stocks that lose investors 100% of their money. But on balance, we believe investing in tech stocks long term is still one of the most exciting ways to invest in the market.

Does that make tech stocks a good investment?

It all depends on the type of tech stock you’re looking at. Several larger tech players involved in some of the most world-changing industries such as cryptocurrencies have plummeted in valuation: they are offering glaring buying opportunities for investors that understand the potential of this new asset class.

However, smaller tech stocks in industries that have suffered for some time may not necessarily be a prudent investment. For example, this includes the semiconductor industry, which has been plagued with shortages and supply chain disruptions for around three years now.

A lot of high-growth companies with next to zero earnings were trading at massive valuations have crashed. But bigger players with strong earnings and not at eye-watering multiples have fared relatively well.

  • Apple is only trading around 15% off its 52-week high
  • Amazon is trading around 34% off its 52-week high
  • Microsoft is trading around 24% off its 52-week high

It is still not great to see stocks in the red. Nevertheless, while others are down 80%, or 90%, these tech giants have kept steady.

The bottom line is that you need to consider fundamentals and solid financials for each investment you make in the tech sector.  

In other words, tech stocks are a good investment, but you really need to be looking at them on a case-by-case basis and how they fit into your strategy and portfolio.

Should I sell my tech stocks now?

Fear and uncertainty can infiltrate a market fast. That’s exactly what we’ve seen in the last few months. And it can push a lot of people over the edge to forget their strategy and exit the market.

But now isn’t a time for panic.

Quite often you hear about investors buying high and selling low. That’s because investing and being successful is equally about the psychology of investing as it is the practical side of investing.

You don’t want to hold on to duds forever, but you also need to consider what the chances are of a recovery.

Ask yourself why you invested in the first place? What made you click buy when you did? Have things changed at all other than the price? Is the company financially robust enough to weather a couple of years with a shrinking economy? Can they still innovate and develop even if the overall markets continue to stay down?

If nothing’s really changed apart from sentiment, then you may want to reconsider before you hit that sell button and lock in those losses.

It might all look hopeless when markets are like this, but they never stay this way forever. The best thing to do is to be patient, stay calm and rational but – most importantly of all – to stick to your investment strategy.

Until next time…

Sam Volkering
Editor, Exponential Investor

PS My pal Shae Russell believes years of inflated tech stock valuations and under-investment in crucial resources means we could be on the verge of a commodities boom. She’s hosting an urgent free event tomorrow where she’ll be quickly running through all the evidence — but most importantly of all, she’s got some plays up her sleeve that could help you become much better off , if commodity prices shoot up the way she predicts. This could be the biggest event of the year at Southbank Investment Research so far…I’ve been told the number of registrations are through the roof! Make sure you don’t miss it. Get your name down here — it goes live at 2pm tomorrow.