What Happened?
A number of stocks fell in the afternoon session after investors grew increasingly concerned that the billions of dollars being invested into artificial intelligence may not generate sufficient profits.
This sentiment fueled fears of a potential "AI bubble," leading to a significant downturn in the technology-heavy Nasdaq Composite index. The selloff was intensified after chipmaker Broadcom warned that increased sales of AI systems could lead to thinner profit margins, causing its stock to tumble. Subsequently, the broader market questioned whether the massive spending on chips and data centers would produce a worthwhile return on investment. This uncertainty caused a market recalibration, with investors rotating capital out of more speculative tech stocks and into more stable assets.
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:
- Finance and Accounting Software company Workday (NASDAQ: WDAY) fell 4.1%. Is now the time to buy Workday? Access our full analysis report here, it’s free for active Edge members.
- Vulnerability Management company Qualys (NASDAQ: QLYS) fell 4.3%. Is now the time to buy Qualys? Access our full analysis report here, it’s free for active Edge members.
- Video Conferencing company RingCentral (NYSE: RNG) fell 5.7%. Is now the time to buy RingCentral? Access our full analysis report here, it’s free for active Edge members.
- Marketing Software company Sprout Social (NASDAQ: SPT) fell 4.3%. Is now the time to buy Sprout Social? Access our full analysis report here, it’s free for active Edge members.
- Data Storage company DigitalOcean (NYSE: DOCN) fell 3.6%. Is now the time to buy DigitalOcean? Access our full analysis report here, it’s free for active Edge members.
Zooming In On RingCentral (RNG)
RingCentral’s shares are very volatile and have had 20 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 24 days ago when the stock gained 4.9% on the news that comments from a key Federal Reserve official bolstered hopes for an interest rate cut.
The positive sentiment followed comments from New York Federal Reserve President John Williams, a voting member of the rate-setting Federal Open Market Committee (FOMC), who indicated he saw room for further policy easing. Following his remarks, the probability of a December rate cut surged from 39% to 71%, according to the CME FedWatch Tool, causing Treasury yields to fall. Lower interest rates can be particularly beneficial for growth-oriented sectors like software, as they increase the present value of future earnings. This renewed hope provided a boost to the sector, which had recently faced pressure from concerns over high valuations in artificial intelligence.
RingCentral is down 15.8% since the beginning of the year, and at $29.34 per share, it is trading 26.5% below its 52-week high of $39.93 from December 2024. Investors who bought $1,000 worth of RingCentral’s shares 5 years ago would now be looking at an investment worth $83.08.
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