This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
What happened
Shares of leading large-cap growth tech stocks Nvidia (NASDAQ: NVDA), Amazon (NASDAQ: AMZN), and Salesforce.com (NYSE: CRM) all fell today, with each down nearly 3% in intraday trading, before recovering to losses between 1% and 2% as of 3:50 PM EDT.
Technology growth stocks that trade at relatively high multiples have been some of the worst-hit names this year, as the Federal Reserve raises interest rates in a bid to tame inflation. That's leading to a double whammy for high-growth stocks, as higher rates compress these companies' price-to-earnings valuations, while investors also fear rising interest rates will slow growth going forward.
Tech stocks have been nearly the mirror image of bond yields this year, as tech stocks have cratered while bond yields have risen dramatically in a short amount of time.
On Tuesday, this theme played out yet again. Even exciting announcements out of Salesforce's Dreamforce conference today weren't enough to overcome this bonds-versus-stocks tug-of-war.
So what
As the Federal Reserve has raised interest rates, short-term yields have gone up. In September, the Fed's tightening posture accelerated, as it began to allow even more Treasury bonds and mortgage-backed securities to roll off its balance sheet, in what is referred to as quantitative tightening.
Since the Federal Reserve won't be buying bonds anymore, that leaves the rest of the investing world to do so, and that world will likely demand a fair market price amid high inflation. Today, the 10-year Treasury Bond yield actually rose past the previous high set in June, hitting 3.6% briefly, before retreating to around 3.57% as of this writing.
Higher bond yields are competition for stocks, and that goes double for high-growth stocks that trade at high price-to-earnings ratios, such as these three. If bond yields rise, stock investors will demand a lower price and a higher earnings yield than they otherwise would have, all things being equal.
In addition, rapidly rising interest rates have dramatically slowed down growth in certain sectors of the economy, especially those that boomed during the pandemic. This includes gaming and crypto mining, which is hurting Nvidia in a big way right now. On the last earnings call, management forecast revenue and earnings to decline in the upcoming quarter, largely driven by plummeting gaming and PC demand.
Amazon is also seeing dramatically slower growth in its e-commerce business, as consumers are now venturing out of their houses to shop more and more, while also buying fewer goods overall amid higher inflation for necessities.
While Salesforce's enterprise software franchise may be the "stickier" of the products among these three, with recurring subscription revenue, management also gave weaker-than-expected growth guidance last quarter, noting lengthening sales cycles among more cautious customers.
Salesforce held its annual Dreamforce conference today, in which it announced several exciting new innovations. These include a new real-time customer relationship management platform called "Genie," that gives up-to-the minute data and insights, as well as a new carbon credit trading platform for businesses.
Despite the excitement, Salesforce was trading in-line with other large-cap growth stocks, as even interesting company-specific announcements are currently being overwhelmed by the market's fixation on interest rates and tomorrow's Fed meeting.
Now what
With tech stocks down significantly and the mood incredibly pessimistic, long-term investors may want to look for opportunities in certain types of tech stocks.
While some would say to look for those that have sold off the most -- those being unprofitable and newly public software and electric vehicle stocks -- I would tend to be more cautious, and gravitate toward higher-quality names like these three.
That's because while the post-2008 environment has generally seen very low interest rates, it's possible we could be adjusting to a new, higher-rate regime. In that light, large-cap technology stocks that don't need to go out and raise money would be safer bets, especially if the economy goes into a recession.
Even better are profitable large-cap technology stocks that can generate enough cash even in a downturn to repurchase their shares at these discounted prices. Fortunately, all three of these companies have implemented share repurchase programs this year.
Amazon announced a $10 billion repurchase plan in March, marking its first repurchase plan since 2012. Nvidia has bought back stock in recent years, but announced in May that it was increasing its buyback plan to $15 billion. Meanwhile, even Salesforce announced its first ever share repurchase plan in August, suggesting management sees value in its beaten-down share price as its growth investments slow.
While the near term may be rough going, the Fed will eventually get a handle on inflation. It may take a slowing economy or even a recession to get there, but all three of these companies have survived recessions before. With management teams now buying back heavily discounted shares, these three stocks are looking more and more attractive for long-term investors after a brutal 2022 decline, despite today's dip.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
