Technology investors have had a rough few weeks, and plenty of people are now looking at positions that are down 20%, 30%, or worse. That is normally when the purchase price starts taking over your thinking. You bought it at $80; it is now $55, and the whole decision becomes about getting back to $80. I would try to forget the $80.
The market does not know what you paid, and the business certainly does not care. If somebody handed you the current value of the position in cash today, would you use that money to buy the stock again? I have always found that a much better way of looking at a loss is that it forces you to deal with the company as it exists now rather than the decision you made six months ago.
This matters particularly in technology because not every stock falling 30% has the same problem. Some companies were simply too expensive. Some are discovering that the AI spending investors shouted about a year ago is going to cost far more than expected. Others are still producing strong cash flow and executing reasonably well, but investors have decided they no longer want to pay the old valuation price. On the screen they can all look equally awful. Financially, they may have very little in common.
A Falling Stock Does Not Tell You Why It Fell
The first thing I want to know is whether the original reason for owning the company still exists. If I bought a business because margins were improving and they are now falling, that matters. If I expected the company to finance growth from its own cash flow and management is suddenly talking about new debt or issuing shares, that matters too. If the competitive position has weakened or a customer that was central to the thesis has disappeared, I am not going to hide behind the fact that the stock is already down 30%.
Sometimes taking the loss is the right decision.
Where investors get themselves into trouble is using the decline itself as evidence that the stock must now be cheap. A stock can fall 30% from an absurd valuation and still be expensive. We have seen that plenty of times in technology. Great business, great growth, terrible entry price.
The opposite happens as well. A perfectly good company can lose a quarter of its value because investors have decided 35 times earnings was too much and 25 times is more sensible. Revenue may still be growing. Margins may be fine. Management may still be doing exactly what it said it would do. In that situation, the business has not necessarily failed. The market has simply changed what it is prepared to pay for it. I would not automatically sell that. That sounds obvious until you are living through it. Watching a stock fall every day makes doing nothing feel irresponsible. Sometimes doing nothing is exactly what the numbers tell you to do.
AI Has Made This More Complicated
The current technology selloff has another layer to it because investors are finally questioning what all this AI spending is going to earn.
For a long time, announcing another few billion dollars of AI investment was almost treated as good news by itself. More chips, more data centers, more infrastructure, more capacity. The assumption was that the demand would justify the spending later. Maybe it will. But now the amounts involved are large enough that shareholders are entitled to ask what return comes back. That is where I would separate companies quite aggressively.
A business throwing off enormous cash flow and financing AI investment internally is in a very different position from one that needs to keep borrowing or issuing stock. If the expected payoff takes two years longer than management thinks, the first company may be able to live with it. For the second, the capital structure can become part of the problem.
This is something I spend a lot of time looking at. A great end market does not guarantee a great investment. If too much capital must go in before the shareholder sees a return, the economics can be disappointing even when the underlying technology is every bit as important as everyone predicted.
That is why I would look at cash flow before the price chart. I want to know whether capital expenditure is rising much faster than revenue, whether free cash flow is shrinking, whether debt is climbing and whether management is becoming more disciplined as the market gets harder. I also want to know what happens if the rosy assumptions do not arrive on schedule. If the answer is that the company needs another financing, I become much less interested in averaging down.
When I Start Getting Interested
Where a selloff becomes attractive is when the share price has changed much more than the business. Look for no disconnect. Perhaps a company misses a quarter because a large customer delays an order, but the underlying demand remains intact. Perhaps the whole semiconductor group is being sold because investors are reducing exposure to AI. Maybe earnings estimates have barely moved while the stock has fallen by a third. Those situations are worth doing some work on.
The balance sheet matters even more when I am considering adding to a losing position. If I am wrong on timing with a company generating plenty of cash and carrying little debt, I may be able to wait. If I am wrong with a highly leveraged company that needs the markets to remain open, I may not get that luxury.
I also watch the reaction to news. A stock that reports good numbers, raises guidance, and still falls tells you that expectations were probably too high. That does not mean it is immediately cheap. It may have further to go. But once bad news starts producing less damage, or a stock stops making new lows despite ugly headlines, I become more interested. The market usually changes its mind before the headlines do.
Individual investors have another advantage here that they often throw away. Nobody is forcing you to buy tomorrow. You can wait for another earnings report. You can see whether management delivers on the promises. You can let the valuation come to you. I would rather miss the first part of a recovery than buy something simply because it used to trade 30% higher.
Forget About Getting Back to Even
This is probably the part people find hardest. There is nothing special about your entry price. If you paid $80 and the stock is worth $55 today, waiting for $80 because that is where you break even is not an investment thesis. The company could now be worth $40. It could be worth $100. Your cost basis tells you nothing about which one is true.
I would go back through the portfolio and ask what I would pay for each business today. Not what it traded at six months ago. Not what an analyst's old target says. Today.
If the thesis has deteriorated badly, I would take the loss rather than spend the next two years hoping the share price forgives me. If the business is still doing roughly what I expected and only the valuation has changed, I may hold it. If the company is financially strong, the economics remain intact, and the market has marked the stock down far more than the facts justify, then I start thinking about adding. That is how I would approach technology after this selloff.
I would not try to make one grand call on whether tech has bottomed out. I have been doing this job for more than 35 years, and I still cannot tell you where the Nasdaq will trade next Tuesday. I can tell you that periods like this are when differences between companies start to matter again.
Weak balance sheets get exposed. Excessive valuations come down. Bad capital allocation becomes harder to hide. Good businesses sometimes get thrown out with all of them.
That last group is where I want to spend my time. If your tech stock is down 30%, stop asking how quickly it can get back to where you bought it.
Ask whether you would buy it today.
On the date of publication, Jim Osman did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.