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Shares of unprofitable technology companies have rallied sharply this year amid rising optimism that the U.S. will avoid a recession and that the Federal Reserve will soon end its interest rate hiking campaign. A basket of unprofitable technology stocks tracked by Goldman Sachs has surged +43% since May, its best three-month performance since 2021 and more than twice the gains of the Nasdaq 100 Stock Index ($IUXX) (QQQ), raising concerns that a speculative bubble may be forming in the stocks.
The rally in unprofitable technology stocks has some analysts concerned about a potential selloff if fundamentals fail to keep pace with the bullish sentiment. John Hancock Investments said, "The big sentiment-driven rally is rewarding the most speculative parts of the market, and if sentiment changes and investors take a renewed look at fundamentals, we think we would see an end to the rallies.” John Hancock Investments also thinks this makes it a good time to take some profits.
The gains in money-losing technology companies this year are in sharp contrast to last year when the unprofitable stocks got hammered as investors liquidated their holdings of the stocks on concerns that higher borrowing costs and a slowing economy could make it difficult to fund operations. The basket of unprofitable technology stocks tracked by Goldman Sachs plunged -62% in 2022, compared with a -33% drop in the Nasdaq 100 Stock Index.
Risk appetite for the unprofitable technology stocks returned this year as concerns that weighed on speculative stocks, such as fears of recession and higher interest rates, subsided. Companies such as Shopify (SHOP) and DoorDash (DASH), which are projected to lose more than $600 million this year, are scheduled to report quarterly earnings later today. Shopify is up 94% this year, and DoorDash is up +77%. Most analysts are not optimistic about future gains for the companies as both stocks are trading above the average analysts’ price targets and have more hold ratings than buy ratings.
Some analysts believe the gains in speculative money-losing technology stocks can continue. According to Mapsignals, “The market is anticipating kind of a Goldilocks environment into year-end and into 2024.” However, John Hancock Investments believes it may be an excellent time to trim riskier positions and focus on companies with cash-rich balance sheets and higher return on equity, saying, “It’s about what you want to own on a relative basis. Do you want to own the kind of high-quality companies that have proven they can outperform in this stage of the cycle, or do you want to own highly speculative names?”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
