What Happened?

A number of stocks fell in the morning session after markets became increasingly wary of high valuations following a significant AI-driven rally.

The tech-heavy Nasdaq fell approximately 1.4% as a wave of caution swept through the market. A key example of this trend is Palantir Technologies, which saw its shares drop around 7% despite reporting record quarterly results that surpassed analyst estimates and raising its full-year revenue outlook. This seemingly contradictory movement highlighted a broader sentiment shift. Investors appeared to be engaging in profit-taking, concerned that the recent surge in AI-related stocks had led to stretched valuations. This broader market caution affected high-growth technology companies that had previously surged on AI optimism but faced increased scrutiny, signaling a potential cooling-off period for the sector. Adding serious weight to this caution, leadership at both Goldman Sachs and Morgan Stanley highlighted the possibility of a correction in the equity markets over the next couple of years. Despite the euphoria driven by AI optimism and the promise of future rate cuts, these banks viewed this cooling-off period not as a disaster, but as a necessary and healthy feature of a long-term bull market.

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:

• Vulnerability Management company Rapid7 (NASDAQ: RPD) fell 2.8%. Is now the time to buy Rapid7? Access our full analysis report here, it’s free for active Edge members.
• Video Conferencing company RingCentral (NYSE: RNG) fell 6.5%. Is now the time to buy RingCentral? Access our full analysis report here, it’s free for active Edge members.
• Data Storage company MongoDB (NASDAQ: MDB) fell 4.2%. Is now the time to buy MongoDB? Access our full analysis report here, it’s free for active Edge members.
• Design Software company Unity (NYSE: U) fell 4.1%. Is now the time to buy Unity? Access our full analysis report here, it’s free for active Edge members.
• Video Conferencing company Five9 (NASDAQ: FIVN) fell 4.4%. Is now the time to buy Five9? 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 24 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 11 days ago when the stock gained 3.1% on the news that a key inflation report came in cooler than anticipated, fueling hopes for a shift in the Federal Reserve's interest rate policy. The latest Consumer Price Index (CPI) report showed a 3.0% year-over-year increase, slightly below the 3.1% that analysts had expected. This moderation in inflation is a significant signal for investors, suggesting that price pressures may be easing. For the tech sector, which is often sensitive to interest rate changes, this news was particularly welcome. Softer inflation could give the Federal Reserve the flexibility to pause or even begin cutting interest rates. Lower rates reduce borrowing costs for growth-oriented tech companies and increase the present value of their future earnings, making their stocks more attractive to investors.

RingCentral is down 20.9% since the beginning of the year, and at $27.56 per share, it is trading 34.1% below its 52-week high of $41.82 from December 2024. Investors who bought $1,000 worth of RingCentral’s shares 5 years ago would now be looking at an investment worth $101.55.

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