Nomi’s Note: For today’s guest essay, I’m passing the baton to my colleague, tech investing legend Jeff Brown.
Jeff has three decades of experience in the tech sector. He’s an expert on identifying and profiting from some of the greatest tech advances of our time.
He has already made gains of 900%… 2,338%… 3,900%… even an incredible 5,344%.
And when I read his message about one key mistake investors make when investing in tech stocks, I immediately wanted to share it with you.
Read on below…
For over two years, the stock market seemed like it could only surge higher…
From the fear-driven pandemic lows set in March 2020, all three of the major American indices had roughly doubled by the end of 2021.
Both stocks and cryptocurrencies absolutely skyrocketed over the past two years.
And with all this bullish sentiment, we saw a surge in new companies going public… often at valuations that simply made no sense.
Consider the cloud computing software company Snowflake (SNOW), for example…
When Snowflake went public in 2020, it was valued at an astronomical enterprise value-to-sales (EV/sales) ratio of 177. That valuation said the company’s worth was equivalent to 177 years of the company’s revenue.
That’s simply nonsensical. Investing at a valuation that high in an initial public offering (IPO) is a near guarantee that we will lose money.
And I was right, as you can see from this chart…
Following Snowflake’s IPO in 2020, shares fell over 50% from its peak.
Over most of 2021, its stock surged once more… Yet since then, shares have tumbled nearly 45%.
With the broader sell-off in tech stocks this year, Snowflake’s shares are now even further below their previous highs.
Of course, Snowflake is just one of many stocks being affected by the current round of volatility…
For the first time in over a decade, a nearly record-setting number of tech stocks have fallen over 50% from their highs.
And this massive sell-off in tech is causing many other high-flying stocks to finally come back down to Earth…
The “Toxic” Stock Sell-Off
The truth is, the massive selling we’re seeing in the stock market right now has been years in the making. In fact, I anticipated it would happen after the market crash of March 2020.
What we saw with the markets during the first half of March 2020 is something I’ll never forget. I’d never seen this kind of widespread fear and panic, not only in the stock markets but in our daily lives as well.
And even as the markets recovered, I observed one persistent trend in IPOs that was alarming.
I saw a lot of tech stocks trading at insanely high valuations… valuations so high that even if those companies met the aggressive growth assumptions, the stocks wouldn’t rise much over the next decade.
And I predicted that if these overvalued companies saw even one misstep or market downturn, the stocks would plummet.
In August 2020, I predicted a “second wave” of stock market selling would hit within the next couple of years. And I profiled several “toxic” stocks to avoid at all costs.
With the recent volatility, we’re seeing my thesis play out…
If we look back over the last year, the peak-to-trough losses for some of these companies are truly staggering. Take a look at these examples:
Zoom Video Communications (ZM): -83%
Fastly (FSLY): -89%
Snowflake (SNOW): -58%
Coupa Software (COUP): -75%
I’m not trying to rub salt in any wounds. These aren’t all bad companies. And some develop technology that I’m very excited about.
But I want you to take away one important point from all of this…
It’s important to understand that valuations matter. Picking great – not just “trendy” – investments matters.
Even the best tech companies with industry-leading technology are not good investments if they are trading at too high of a valuation. Investing at an irrationally high valuation in a fantastic company will still lead to losses.
It’s these companies I want you to avoid.
Which Companies Can Withstand Volatility?
With the markets punishing high-flying companies like the ones I profiled, I know many investors have one question on their minds: Which tech companies can withstand all the volatility we’re seeing in the broader market?
Though there are many exciting opportunities in public tech companies… I want to turn our attention to another exciting area of investment that can bring us truly generational wealth over time.
Unlike stocks, these investments are shielded from the volatility of broader markets.
In many ways, they are the best-kept secrets in tech. And these investments have been used for decades by wealthy and connected families to protect and grow their wealth through good economic times and bad.
And I’m going to hold a very special investment summit to tell readers all about these opportunities…
On Wednesday, April 6, at 8 p.m. ET, I’ll provide all the details during my State of the Tech Market summit.
And I’d like to invite you to attend. Simply sign up by going right here.
They’re trading at valuations lower than most people ever see in the stock market… They won’t go down in a recession… And they won’t go down in a market crash.
I’m excited to tell you all about this unique group of investments on April 6 at 8 p.m. ET.
I’d love to see you there.
Editor, The Bleeding Edge
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