What happened
Tech stocks are starting the week off on the right foot Monday, with the tech-heavy Nasdaq scoring gains of more than 2% through 12:25 p.m. ET. Shares of cloud-based database specialist MongoDB (MDB +1.77%) are doubling that gain, up 4.1%. Cybersecurity stocks Zscaler (ZS +0.16%) and CrowdStrike (CRWD +3.03%) are doing nearly as well, up 3.2% and 3.7%, respectively.
And curiously, all of these gains come as Wall Street lowers the boom on tech stock valuations.
NASDAQ: CRWD
Key Data Points
So what
Investment banker Truist Financial (formed by the merger of BB&T and SunTrust in 2019) cut its price targets on MongoDB, Zscaler, and CrowdStrike this morning.
Citing macroeconomic uncertainty and the risk of further Federal Reserve rate hikes, and warning that investors need to be more conservative in their valuations of tech stocks, Truist cut its valuation on CrowdStrike by 12.5% this morning, to $175 a share. MongoDB got hit with a 22% cut to its target price, to $235 a share. Zscaler suffered the cruelest cut of all, a 39% decimation of its target price, which is now set at $153 a share, reports ratings watcher The Fly.
And yet, despite all the cutting, Truist maintains that investors should still buy all three of these stocks. Why is that?
Now what
Well, not to overlook the obvious, at a current share price of less than $177, Truist still believes that MongoDB stock, for example, could go up 33% through the end of 2023. The banker sees the potential for Zscaler to gain 42% this year, and for CrowdStrike to soar a staggering 78% beyond its current sub-$100 share price. So even at what it considers more "conservative" valuations, Truist still sees a lot of potential in each of these three stocks.
Granted, Truist has been wrong before. Over the past year, CrowdStrike has seen more than half its value evaporate in a wave of tech stock selling. MongoDB and Zscaler are both down more than 60% in the last 52 weeks -- and Truist has been telling investors to buy these shares the entire time (for Zscaler and CrowdStrike at least; the analyst only began covering MongoDB in September, according to data from StreetInsider).
And Truist could still be wrong today. Valued at 36 times trailing free cash flow, CrowdStrike is the cheapest of these three stocks -- none of which are currently profitable under generally accepted accounting principles (GAAP). Zscaler costs an even steeper 55 times trailing free cash flow, and MongoDB has no cash profits at all, according to data from S&P Global Market Intelligence. While it's true that analysts by and large still have strong feelings about the growth prospects for all three of these growth stocks, it's the potential for growth to slow in a recession -- and for further Fed rate hikes to slow growth even more -- that is precisely the risk Truist is warning about in cutting its price targets today.
Call me a skeptic, but that seems a strange reason to continue recommending these high-priced growth stocks today. If you absolutely, positively feel you still have to invest in growth stocks, I'd urge you to at least avoid the expensive ones, and consider an investment in a stock offering growth at a reasonable price.
