Tuesday, November 28

Why Technology Stocks Crashed Today

What happened 

The stock market is taking a big downturn on Thursday and technology and growth stocks are some of the hardest hit. Investors are worried about rising interest rates, a slowing economy, and the fallout from the Federal Reserve pulling back its asset-buying, which is known as quantitative easing. 

Three of the hardest hit were Zoom Video Communications (ZM -7.47%), DocuSign (DOCU -8.56%), and Okta (OKTA -7.75%), which are all major enterprise software-as-a-service (SaaS) stocks, fell dramatically in today’s trading. Zoom fell as much as 8.9%, Docusign was down 10.6%, and Okta dropped 8.8% at its low. These stocks closed the day down 7.5%, 8.6%, and 7.8% respectively. While it may be hard to stomach, this is starting to look like a buying opportunity for companies like this. 

Image source: Getty Images.

So what 

Yesterday, Federal Reserve Chair Jerome Powell said the Federal Reserve is not considering rate hikes higher than 50 basis points this year after raising rates by exactly that amount to 0.75% to 1% for short-term Treasury bonds. 

Interest rates on everything from mortgages to corporate bonds have gone up as a result and when combined with negative gross domestic product in the first quarter of 2022 there’s a concern the U.S. could be headed for a difficult economic year. 

Investors will often sell off riskier assets, like growth and tech stocks, in this kind of environment and that’s what’s happening here.

Now what 

What’s important to understand about the current market is that everything is down and that means good stocks are being thrown out with the bad. Zoom, DocuSign, and Okta specifically are critical business tools that have high gross margins and positive free cash flow. That’s a good position for investors to be in during a downturn because these are going to be among the stronger companies in the market. 

ZM Revenue (Quarterly) Chart

ZM Revenue (Quarterly) data by YCharts

While operations are relatively strong, it’s unclear when these stocks, or the market overall, will bottom. Investors have known about news like rising interest rates and inflation for months, but seem to be selling both the rumor and the news. 

As hard as it seems right now, I think these are great buying opportunities for durable long-term businesses. Zoom is a go-to name in video calls, DocuSign is a critical tool for businesses around the world, and Okta is a huge name in digital security. I think long-term investors should see falling prices as an opportunity to get great companies for lower prices than these stocks have seen in years. 

With that said, this may not be the bottom for stocks. If the U.S. economy is indeed in a recession and interest rates do go up, it could be a long year for investors. 

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