Warning for investors chasing high-flying tech stocks

As higher rates discount the present value of future profits, the highest-rated tech stocks suffered the most, as the Nasdaq 100 index saw a 1.2% drop from record levels on Monday. The tech-heavy index extended losses on Tuesday, falling 1.2%.

The biggest laggards on Monday’s gauge included three fast-growing yet unprofitable companies, Crowdstrike Holdings Inc., Atlassian Corp. plc and DocuSign Inc. All have been valued largely on the back of their growth potential, trading at 38 times expected annual growth of 23 times. sales. One of the index’s big losers on Monday was loss-making Peloton Interactive Inc, on concerns over slow growth this year after its stock plunged.

According to Bloomberg Intelligence, the action could be a preview of whether interest rates should continue to rise for some of tech’s highest fliers. The fastest-growing software stocks could see their valuations fall by more than 20% next year, analysts including Anurag Rana wrote in a research note on Friday.

Goldman Sachs Group Inc. has a similar approach: “Avoid fast-growing firms based solely on long-term growth expectations, which will be more vulnerable to rising interest rates or the risk of disappointing revenues.”

Strategist David J. Kostin prefers companies with reliable profit margins such as Mastercard Inc., Meta Platforms Inc., Autodesk Inc. and Zoom Video Communications Inc.. Consensus estimates for Mastercard’s 2023 profit margin are 47%, while others are around 30%. Kostin said in a note. Their valuations based on 12-month forward sales are also about half that of loss-making tech companies, according to Bloomberg data.

Bank of America Corp is also cautious. Investors can expect a “rate shock” in 2022, strategists led by Michael Hartnett wrote in a note on Monday, calling the “mother of all bubbles” in cryptocurrency and tech stocks.

This story has been published without modification in text from a wire agency feed.