Tech stocks have had a bad October, as the Nasdaq Index fell by over 3.89%. Several factors were at play. Just recently, the 10-year treasury yield breached 5%. Fundamentally, this reduces the value of tech stocks because investors get a lot of yield for an asset with no risk. This has led to the emergence of stocks to sell.
Inflation and GDP growth have also been stubbornly strong, prompting many to think the Fed is likely to continue raising interest rates. Continued, the robustness of the US economy is anticipated to weaken due to various challenges on the horizon, such as rising bond yields and the restart of student loan repayments.
The summer market highs are now ending, making now the perfect time to dump these stocks to sell.
Apple (AAPL)
Despite falling from its all-time highs during the summer, Apple (NASDAQ:AAPL) stock is still up over 30% YTD. Though Apple has had a good earnings record, the stock is no longer known for its growth. Apple has reached maximum penetration with its iPhones and has only seen its sales decline.
Even though services are growing nicely, it hasn’t been enough to offset its hardware growth. This is not helped by the fact that 2023 will be the first year that Apple doesn’t update its iPads, meaning there will likely be a significant decline in revenue. As a result, analysts expect an average of a 2.83% decline in revenue YoY.
There are also lots of geopolitical and regulatory risks facing Apple. First, China represents almost 19% of Apple’s sales. Apple is a bargaining chip that China has over the US during conflicts, seeing as it recently banned party officials from using iPhones. It’s currently being sued in countries worldwide, from the US, EU, China, and India to South Korea. Lots of these lawsuits seek to break up Apple’s monopoly in its services segment, such as the App Store and Apple Pay. Most importantly, investors are paying Apple a premium in valuation.
Its P/E ratio is over 28x, compared to the S&P 500 average of 23.81. Investors are taking on a lot of risk and getting slow growth from Apple. When treasuries are now yielding 5%, it will be more difficult to justify this premium.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) was the Wall Street darling after OpenAI took the world by storm. Though the stock was down over 8% in October, it experienced a 187% increase YTD. The decrease came from two main reasons. First, investors are realizing profit in their Nvidia positions after its stock price surged.
Nvidia’s CEO was not shy to sell over a billion worth of Nvidia stock this year. The second reason is geopolitical tensions. Nvidia is at the center of U.S. and China tensions. The company had to halt AI chip exports to China due to national security concerns, and geopolitical tensions will prevent Nvidia from ever penetrating the Chinese market. This is why it’s one of those stocks to sell.
A more significant threat to Nvidia, however, is the assumption that its valuation rests on. Investors poured their money into the company because it’s supposed to be the leading supplier of artificial intelligence. Even though AI is estimated to be worth trillions of dollars and Nvidia is a market leader, AI’s growth rates and market leadership are not guaranteed.
With high interest rates giving investors higher yields on better assets, geopolitical tensions, and sell-offs by investors to cash in, the momentum for Nvidia could soon take a turn for the worse.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) stock is up an impressive 82% YTD but has fallen over 20% in the past month due to margin concerns. Because the EV market is so competitive, Tesla has had to slash prices to maintain sales. Gross margins have declined from over 20% to 17.9% in Q3. As a result, net income fell by over 30% QoQ. Even though the stock has declined considerably, there’s still a significant possibility that this is just the beginning.
What’s more, Tesla is currently ramping up production for its well-anticipated cybertruck, meaning that free cash flow will be negatively impacted. As a result, estimates will likely lower, and the stock price will take a hit.
There are also several macroeconomic factors at play. First, inflation is still rising rapidly. Although Americans have kept on spending, savings are running out. Furthermore, the Federal Reserve might continue raising interest rates, which impacts affordability. Not to mention, with treasuries at 5%, investors are getting more yield with total security, making stocks like Tesla less attractive. Overall, Tesla’s bottom line is declining while facing macro headwinds. This sell-off now could be the start of a more significant decline. With these factors considered, it’s one of those stocks to sell.
On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.