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Why Tech Stocks Have Further To Drop

Mar. 07, 2021 9:00 AM ETAMLP, ARKK, SPG, SPG.PJ, XLK92 Comments


  • Tech stocks have dropped recently, but they remain extremely expensive.
  • Interest rates are back on the rise and the pandemic is coming to an end. Both are serious headwinds for tech stocks.
  • Other sectors present better value and the opportunity cost of investing in tech stocks is on the rise.
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Lately, Tech stocks have taken a beating.

Amazon (AMZN) is down 10%...

Apple (AAPL) is down 12%...

Zoom (ZM) is down 16%...

Tesla (TSLA) is down 28% (!!!)

And The ARK Innovation ETF (ARKK), which invests heavily in all the hot tech stocks, is down by 18%.

Is this pullback the long-awaited opportunity to buy tech stocks?

ChartData by YCharts

From the title of this article, you probably already know our thoughts on that.

We think that tech stocks have further to drop and this recent correction could be just the beginning.

While it's impossible to know how the market will behave in the short run, we don't like the risk-to-reward of tech stocks even at these lower prices.

Here are five reasons why:

Reason #1: The Recent Drop is Just the Tip of the Iceberg

Just because something has dropped recently does not make it a bargain.

Even after the recent sell-off, most tech stocks are up by a very large amount.

As an example, the ARK Innovation ETF is still up by over 100% over the past year:

ChartData by YCharts

So the bigger picture remains the same:

Tech stocks are still trading at extremely high valuations, and the recent sell-off doesn't change that.

Paying 50-100x earnings for something after it's already up by a significant amount is not what we would call a buying opportunity.

As interest rates continue to rise, it's normal for these nose-bleed valuations to revert closer to where they used to be. In fact, the recent drop could very well be just the beginning.

Reason #2: High Sensitivity to Interest Rates

All it took for valuations to start dropping is a small surge in Treasury rates. The market is essentially telling us that 1.5% is too much to sustain these extreme valuations in the tech

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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