High-growth Nasdaq stocks are getting crushed right now. Electric vehicle manufacturer Rivian is a prime example. Yesterday, its share price ended the day at $81 after starting the year at $104.
So, what’s behind this sell-off? And is it time for me to start buying some beaten-down Nasdaq growth stocks for my portfolio?
Why are Nasdaq stocks falling?
The latest bout of volatility across the Nasdaq is predominantly down to bond yields, which have surged higher this year. Yesterday, the 10-year US Treasury yield climbed up to around 1.8%, roughly 20% higher than the yield at the start of the year.
The reason this has impacted growth stocks is that analysts typically value stocks by discounting their future earnings and cash flows back to a ‘present value’ using an appropriate interest rate. If interest rates are higher, future earnings and cash flows are discounted back to the present value at a higher rate, which gives a lower value. This ultimately impacts the projected value of the stock. Those with no earnings in the foreseeable future (such as Rivian) tend to be hit the hardest because their future earnings are discounted back heavily.
I’ll point out that I’m not particularly surprised by this sell-off across the Nasdaq. One of my top predictions for 2022 was that expensive high-growth stocks such as Rivian could struggle this year as valuation becomes more of a focus for investors. It’s obviously still early days, but so far, that prediction is looking pretty good.
Is it time to buy Nasdaq stocks?
As for whether it’s time for me to buy some high-growth Nasdaq stocks for my portfolio, here’s how I see it.
I expect bond yields to go higher this year. I think the 10-year US Treasury yield could easily hit 2% as the US Federal Reserve hikes interest rates. So, I expect to see further volatility across the Nasdaq. That said, I think it’s a good time to start buying some high-quality Nasdaq names for my portfolio. Because right now, many stocks are beginning to look attractive from a valuation perspective, to my mind.
It’s worth noting here that Nasdaq stocks can generally be divided into two categories. There are those that are generating strong levels of earnings and cash flows now, such as Microsoft, Adobe, and Nvidia. Then, there are those that are not expected to generate earnings for many years such as Rivian, Peloton, and DraftKings. I’ll be looking to invest in the former category – those that have earnings and cash flows now. The reason for this is that I expect the share prices of these companies to be impacted less by rising bond yields.
One stock, in particular, that I think looks interesting right now is Microsoft. This is one of my favourite companies due to the fact it operates in a number of high-growth industries. After a recent share price pullback, its valuation is looking quite attractive, in my view.
Another is Adobe, which has pulled back from around $700 to near $500 recently and now trades on a P/E ratio of less than 40. I think that’s quite reasonable given Adobe’s dominance in the content creation software market.
Of course, these stocks could fall if bond yields continue to rise. However, I expect them to do well in the long run, as the world becomes more digital.