Money-Losing Tech Stocks Fade Again as Fed Stays Hawkish

(Bloomberg) -- The brief record rally this month in shares of unprofitable and highly valued technology companies is starting to look like a short-lived blip amid a steady drumbeat of hawkish commentary from Federal Reserve officials.

A basket of money-losing tech stocks compiled by Goldman Sachs Group Inc. jumped 15% on Nov. 10 after a report showed US consumer-price inflation cooled in October more than forecast. The news led to speculation the Fed had room to slow its pace of interest-rate increases. 

Investors tried to keep pushing the stocks higher: A similarly positive report on producer prices led to a smaller pop last week. But the index has since faltered, leaving it below where it closed on Nov. 10. It sank 2.8% on Monday, on track for a fourth straight decline. The Nasdaq 100 Index fell 0.5%.

While rising rates have hammered tech stocks broadly this year, riskier companies have been hit especially hard. It’s a dramatic reversal from the steady climb they enjoyed during the pandemic, when economic stimulus and the Fed’s easy-money policies spurred a flurry of speculative buying. 

“There are people who will buy almost anything on any sign of good news, and a ‘dash for trash,’ where people jump into junky or unprofitable stocks, is a classic thing to see on days like that,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab Corp. “While it’s never a great idea to be in low-quality names, these look especially risky now as the conditions for speculation have reversed.”

The Goldman basket is down 62% this year, while the Nasdaq 100 is down 29%. Among notable names, C3.ai Inc. is down 60%, SentinelOne Inc. has dropped 68%, and Asana Inc., Okta Inc., and UiPath Inc. have all collapsed more than 70%. Even after their declines, all trade at a premium to the Nasdaq 100 in terms of price to estimated sales.

Higher rates hurt shares of unprofitable and high-valuation growth companies the most, because their shares are priced on their prospects far out in the future, with bond yields used to discount into today’s dollars the value of earnings that companies may not see for years. Inflation, along with the Fed’s attempt to combat it by aggressively raising rates, has led to Treasury yields jumping from 1.5% at the start of the year to 3.76%, and recently hitting their highest since 2008.

In the latest sign the Fed may not be about to reverse course, St. Louis Fed President James Bullard last week said the US central bank should raise interest rates to at least 5% to 5.25% to combat inflation, well above the current 3.75% to 4%.

The comments followed a similar statement from San Francisco Fed President Mary Daly. Governor Christopher Waller expressed openness to the Fed raising rates by half a percentage point next month, less than recent increases of 0.75 point, but he downplayed the significance of the CPI report.

“I cannot emphasize enough that one report does not make a trend,” he said. “It is way too early to conclude that inflation is headed sustainably down.”

If the Fed does maintain an aggressive strategy of hikes, the yield headwind could grow more pronounced. And while rapidly climbing sales led to these stocks receiving nosebleed valuations, the prospect of a recession has diminished their attractiveness on growth characteristics, giving investors another reason to focus on companies with positive earnings and cheaper valuations. 

Jim Awad, senior managing director at Clearstead Advisors, expects investors will sort tech stocks into two categories: companies with durable earnings and cash flow, which should regain their losses over time, and then the speculative, unprofitable ones.

“Investors will remain gun shy about the second class of company,” he said. “They got so overvalued, they’ve fallen so much, and some investors have been devastated. The momentum game is over. They can maybe bounce from here, but they won’t be market leaders the way they were before the peak.”

Tech Chart of the Day

Shares in Walt Disney jumped 8.5% Monday as investors cheered the surprise return of Bob Iger to the helm of the theme-park and entertainment company. Disney, which Iger led for 15 years until February 2020, has shed $114 billion in market value this year, and shares are set for their biggest annual drop since the 1970s. Iger, who replaces Bob Chapek, now faces the challenge of reversing that decline. 

Top Tech Stories

• Walt Disney Co. shares jumped after it brought back former leader Bob Iger to replace his successor Bob Chapek as chief executive officer, a surprise capitulation by the board after a string of disappointing results.
  • Chapek leaves Disney’s top job with exit payments and benefits that could be worth more than $23 million. That’s without including the millions more he could collect in the coming years if the company’s share price recovers.
• For investors looking for a dip-buying opportunity in the global chip industry, Berkshire Hathaway Inc. may have a recommendation: Taiwan Semiconductor Manufacturing Co.
  • TSMC founder Morris Chang said the congratulations he offered Chinese President Xi Jinping about the congress that his ruling Communist Party recently held were his own personal view.
• American musician Ye has returned to Twitter after a two-week hiatus from the social network, and new owner Elon Musk welcomed him back on the platform. Musk also reinstated Donald Trump, but the former president says he’ll stick with his own Truth Social network.
  • Twitter Inc.’s head of France announced his departure in a tweet on Sunday ahead of what may be additional layoffs at the embattled platform coming as soon as Monday.
• GoTo Group reported a narrower third-quarter loss, helped by cost cuts at the Indonesian ride-hailing and e-commerce giant.
• The founder of Atoss Software AG is exploring strategic options for the German-listed developer after it attracted takeover interest from private equity firms, people familiar with the matter said. Atoss software helps companies manage their workforces.
• Two US senators called TikTok a Chinese surveillance tool, issuing a bipartisan warning as the Biden administration weighs a deal that could let the video-sharing app keep operating in the US.

--With assistance from Subrat Patnaik and Thyagaraju Adinarayan.

(Updates to market open.)

©2022 Bloomberg L.P.