What Happened?
A number of stocks fell in the afternoon session after investor caution spread amid concerns that the rally in artificial intelligence stocks might have created a bubble.
After a fantastic run, many of those high-flying AI and technology stocks saw investors take profits: selling shares to lock in their gains. This is often called a "market rotation." Money is moving out of the red-hot tech sector (which some worry has become too expensive) and into other parts of the market that investors may currently deem more stable or reasonably-priced.
There's a secondary reason for the cautious mood: The long government shutdown came to an end. Though it's typically interpreted as good news, it also means a flood of delayed economic reports will be released. For weeks, investors were "flying blind" without key updates on the economy's health, like inflation data and the jobs report. In typical "sell the news" fashion, investors may also be taking profits and selling in anticipation that the new data would potentially give the Federal Reserve reasons to slow or even pause future rate cuts.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.
Among others, the following stocks were impacted:
- Advertising Software company PubMatic (NASDAQ:PUBM) fell 4.3%. Is now the time to buy PubMatic? Access our full analysis report here, it’s free for active Edge members.
- Data Analytics company Strategy (NASDAQ:MSTR) fell 4.7%. Is now the time to buy Strategy? Access our full analysis report here, it’s free for active Edge members.
Zooming In On Strategy (MSTR)
Strategy’s shares are extremely volatile and have had 67 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 13 days ago when the stock gained 7.5% on the news that its third-quarter revenue topped Wall Street's estimates and it posted a massive profit, driven by unrealized gains on its large Bitcoin portfolio.
The company, a major corporate Bitcoin holder, reported a GAAP profit of $8.42 per share. While this missed analysts' consensus, the result represented a significant turnaround from a loss in the same period last year. This swing was primarily due to paper gains on its Bitcoin holdings, which increased to 640,808 BTC. Operationally, total revenue for the quarter grew 10.9% year-over-year to $128.7 million, exceeding expectations. Strategy's business model is closely tied to the cryptocurrency's price, making its financial results subject to large swings.
Strategy is down 29.8% since the beginning of the year, and at $210.72 per share, it is trading 55.5% below its 52-week high of $473.83 from November 2024. Investors who bought $1,000 worth of Strategy’s shares 5 years ago would now be looking at an investment worth $10,960.
The 1999 book Gorilla Game predicted Microsoft and Apple would dominate tech before it happened. Its thesis? Identify the platform winners early. Today, enterprise software companies embedding generative AI are becoming the new gorillas. Click here for access to our special report that reveals one profitable leader already riding this wave.