Shares of some of the market's hottest stocks took a big step back this week as investors reconsidered whether these stocks have run too far too fast in 2024.
According to data provided by S&P Global Market Intelligence, shares of IonQ (IONQ -5.72%) fell as much as 22.3% this week, AppLovin (APP -3.33%) dropped 20%, and BigBear.ai (BBAI -5.39%) fell 28.4%. As of Friday at 2:30 p.m. ET, these three stocks were down 12.2%, 19.2%, and 26.9%, respectively.
The hottest stocks on the market
It's worth looking at how these three stocks have performed over the past three months alone. You can see they were hot ahead of the election and then took off post-election on speculation the economy would boom in 2025 and beyond.
The bounce in shares was almost entirely speculation and not a fundamental improvement in the business, so eventually, that speculation ended.
Fundamentals may be returning to the forefront
While these stocks have been hot, they haven't all been performing all that well financially. AppLovin is very profitable, but the others are not and may be years away from reporting a consistent profit.
IONQ Net Income (TTM) data by YCharts. TTM = trailing 12 months.
At the same time, valuations are starting to look stretched. Even AppLovin's 26 price-to-sales multiple is extremely high for an established player in advertising.
IONQ PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
Add all this together, and valuation may have gotten ahead of fundamentals for all three stocks.
Volatility is the price we pay
Highly volatile stocks like this can be market beaters over time, but they don't often go up and to the right in a straight line. There are fits and starts both in operations and in valuation.
That's part of what we're seeing today. AppLovin is catching up from being undervalued coming out of the impact of Apple's ATT changes and may have now overshot its fundamentals. IonQ is benefiting from the emerging visibility in quantum computing, particularly after the announcement this week from Alphabet's Google.
BigBear is growing nicely, with revenue up 22% last quarter and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) moving positive. But even those results may be volatile given the nascency of artificial intelligence (AI) in the company's markets.
While the past three months were great, that trend reversed this week, and I think that's the takeaway from trading.
The market's speculation and fundamental reality
Short term, the market is driven by speculation about the next big thing. But going from hot technology, like quantum computing or AI, to a profitable business can be a long journey. And stocks often pull back when the hype cycle ends.
This was only one week of trading, so it isn't worth panicking, but it's also a reminder that stocks go down more quickly than they go up. If the market starts to worry about economic growth or interest rates in the coming months, we could see all of the recent gains in stocks given back. And unless a company has profits to fall back on, that can be a real challenge.
