Why are my Tech Stocks Down?
Over the past couple of months, many of you have been wondering why most of your high-flying tech stocks have been going down. 2021 was a fantastic year of tech, which led to the growth of numerous companies such as Paypal, DocuSign, Salesforce, and more. However, most of these stocks have recently dipped and led to many of its holders seeking answers. Without further ado, here are some insights as to why the best tech performers of 2021 have been sputtering out.
Unfortunately, stocks don’t go up in a straight line and need a pullback somewhere. As the common saying goes, things that go straight up, tend to fall back even harder. Pullbacks and dips are healthy for the market, as it creates more buying opportunities for the market and leads to less risky, margin-induced FOMO buying from investors salivating at higher gains for trendy stocks. This leads to a healthier balance for the market, which dissuades investors from seeking unrealistic gains that won’t constantly happen over the long run.
Interest rates are slated to rise from the Federal Reserve, which harms the valuations of Tech Stocks with high growth, and less short-term profitability. Many of these tech stocks rely on injecting funds and cash into their business in order to scale up. Their short-term objective isn’t profits; therefore, they need to burn large amounts of cash in order to stay competitive and drive their momentum. With interest rates at near all-time lows, it’s extremely beneficial to borrow cash and inject more capital into their business. However, the potential rise of interest rates harms the growth of the potential tech giants of the future.
Many tech companies who thrived and had surprisingly high growth rates due to covid, saw their growth sputter out and lowered to baseline once covid regulations lessened. Many companies who thrived with the remote work wave, such as Docusign, or the switch to digital payments and a cashless society like Paypal, saw their unrealistic growth rates get much smaller towards the tail end of 2021. As investors realize that their growth was pulled forward instead of shifting to a higher baseline, they re-assessed the valuations of their stocks and decided it was too expensive to their likings.
With this shift and realization of lower growth rates, a sector rotation towards stocks with already existing strong balance sheets and cash reserves has already begun. This is why many companies, even in the tech sector such as Apple, have actually been growing over the past month because most investors want to park their funds in stocks that are already doing well and don’t need to borrow money. With their high cash reserves, their company’s financial prospects are deemed much more attractive.
With these reasons in mind, what should I do? As I keep reiterating, time in the market beats timing the market. If you have extra cash on the sidelines, now would be a great opportunity to evaluate many exciting companies and invest in them. There’s no guarantee that the pullback will stop, and that stocks will finally recover and climb higher in the short term. However, in the long run, now certainly seems like a great buying opportunity to start positions in many enticing companies.
