The ongoing digital transformation in nearly every industry, along with the near-zero interest rate environment, have positioned the tech industry nicely for solid growth. However, Appian (NASDAQ:APPN) and Asana (ASAN) have reached a valuation that is far ahead of their financials and growth prospects. Also, Wall Street analysts expect the prices of these stocks to tumble in the coming months. Hence, we think it’s best to avoid these names now.The tech space has been recovering lately due to increasing demand for advanced technologies in almost every industry. The Federal Reserve’s decision to keep benchmark interest rates unchanged for now is also a growth catalyst for the industry. Consequently, the tech-heavy Nasdaq Composite has been hitting new highs lately. Indeed, it hit its $14,505.19 all-time high yesterday.
Investors’ increasing interest in tech stocks is evidenced by the Technology Select Sector SPDR Fund’s (XLK) 6% returns over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 1.8% gains. However, investor interest is also leading to sky-high valuations for some fundamentally weak tech stocks.
For instance, we do not believe the current valuation levels of Appian Corporation (APPN) and Asana, Inc. (ASAN) are justified by their financials and growth prospects. In fact, Wall Street analysts expect these stocks to retreat in the near term. So, it’s wise to avoid these stocks now.