Given what valuations are like for many quality tech names following an epic plunge, the long-term risk/reward looks very good for the sector as a whole right now, in spite of how uncertain and gut-wrenching the next few months are shaping up to be for both the tech sector and the economy at-large.
But with many recent high-flyers having only dropped to November and December levels in spite of this winter's carnage, there might need to be one last wave of selling that hits the former high-flyers hard before a bottom is put in.
As of the time of this article, the Nasdaq is at 7,290 -- down more than 25% from its February peak, but near its prior 52-week low (hit in June 2019) of 7,292. The Nasdaq is also about 18% above a Dec. 2018 low of 6,190.
Plenty of well-known tech names have plunged to new 52-week lows this week -- Facebook (FB) , Uber (UBER) , Amazon.com (AMZN) , IBM (IBM) and Texas Instruments (TXN) are some notable examples. But there are also quite a few prominent names that remain up 25% or more from their 52-week lows. The list includes Microsoft (MSFT) (up 31%), Apple (AAPL) (up 51%), Taiwan Semiconductor (TSM) (up 33%), Netflix (NFLX) (up 26%) and Applied Materials (AMAT) (up 27%).
There are also a handful of well-known tech companies that still sport massive gains relative to their 52-week lows. This list includes Nvidia (NVDA) (up 70%), AMD (AMD) (up 86%), Shopify (SHOP) (up 106%) and of course, Tesla (TSLA) (up 217%).
Gains relative to late-2018 and early-2019 lows are often much bigger. Applied Materials and Microsoft (to give a couple of examples) are up 67% and 55%, respectively, from their Dec. 2018 lows.
None of this is to argue that these companies need to (never mind deserve to) make new 52-week lows before the market bottoms, particularly given that many of them shared quite a lot of good news between Dec. 2018 and Feb. 2020. Apple, for example, has seen a stronger-than-expected iPhone 11 cycle and an AirPods boom since hitting its May 2019 52-week low. Nvidia has seen a major rebound in server GPU sales since its 52-week low was hit, and Netflix has calmed fears that the Disney+ launch would lead to major subscriber losses.
But either way, the fact remains that many long-term investors in these companies still have large paper profits. And in a panic-inducing situation like the current one, a lot of investors in possession of large paper profits are prone to sell first and ask questions later.
Such selling -- when combined with panic-selling from others, as well as margin calls and fund redemptions and liquidations -- undoubtedly creates opportunities for more level-headed investors who have cash to deploy and can stomach a highly volatile near-term market environment, just as we saw in late 2018 and early 2016.
However, it also often spells one final bout of capitulation during which the companies that blasted off during the last bull run are hit hardest.