The last couple of weeks has been pretty rough for tech stock investors. Despite many of these businesses delivering impressive growth and cash flows, shares have been falling like a tonne of bricks.

The NASDAQ Composite index, which primarily consists of tech stocks, has crashed by over 15% since the start of 2022 alone! And for many of its constituents, the decline is far more severe. 

Obviously, this is quite an unpleasant experience for investors. So, why am I really excited about this market environment?

Let’s take a look at the catalyst behind the tech stock crash. And why I think now could be a fantastic buying opportunity for my portfolio.

Inflation is disrupting the nation

By now, the word inflation is probably familiar to almost all investors. It has, after all, been in most of the headlines for the past couple of months. And as fears of an economic slowdown start to mount due to the jump in everyday prices, tech stocks are being slammed. But why?

To combat the rising level of inflation, central banks like the Federal Reserve or the Bank of England have begun deploying tighter monetary policy. It’s a bit complicated, but the bottom line is that this translates into an interest rate hike.

While unpleasant for consumers, rising borrowing costs remove excess cash from the economy, bringing inflation back under control. But tech stocks very rarely carry a significant amount of debt on their balance sheets. These businesses prefer to go down the equity route of raising money through venture capital firms or by going public with an IPO. So, how do rising interest rates affect them?

What’s causing tech stocks to plummet?

For the most part, rising interest rates have no direct effect on a debt-free business. But it does make raising additional capital more expensive. And since most of these businesses aren’t profitable, they are primarily dependent on raising capital.

As the cost of debt rises, it also influences the cost of equity. After all, equity investors are taking a greater risk. And if the returns on debt increase, as they are right now, then the rewards for equity should also increase to reflect the higher risk profile. The end result is that the cost of capital for every business, leveraged or not, goes up.

Since the present value of a business is derived from its future cash flows, any jump in the cost of capital can send valuations plummeting. This effect is only amplified when a stock is trading at an enormous premium like many tech stocks have been over the last two years. That’s why these shares are being hit the hardest right now.

Why is this a good thing?

Watching my portfolio drop by double digits has been quite an unpleasant experience. And I’m sure members of The Money Cog Premium are feeling the same way when looking at some of my top stock picks from back in October last year. One example would be MongoDB that’s dropped over 20%! 

But as a long-term investor, I’m personally not worried about this horrendous slide. Why? Because this situation is ultimately a short-term problem. Even if inflation doesn’t turn out to be temporary, high-quality enterprises with proven business models should be more than capable of adapting to the new economic environment once the dust has settled.

Will tech stocks continue to fall from here? It’s entirely possible, which means further volatility could lie ahead. I won’t pretend to know when the market will reach the lowest point in the dip. Predicting the irrational behaviour of human beings is like tossing a coin in my experience.

But monetary policy is a constantly shifting landscape. And macroeconomic factors are not something that’s ever driven my investment decisions. 

So, while most investors are panic-selling their positions, I’m getting ready to start buying shares at what could be an enormous discount considering their long-term growth and value-building potential for my portfolio.

Zaven Boyrazian does not own shares in the companies mentioned. The Money Cog has published an investment report on MongoDB. Views expressed on the companies, assets, and strategies mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.