As interest rates appear set to keep rising, and the US economy appears likely to continue to decline, tech stock valuations have plummeted, but analysts note that they cannot keep dropping forever.
Slack Founder Stewart Butterfield indicated in a recent interview that tech valuations are approaching levels where investors will not be able to avoid buying in. He said, “The multiples have probably come down to something that looks pretty reasonable,” although he acknowledged that, “the last six months have been pretty rough.”
As the Federal Reserve has raised interest rates, it has also raised the cost of the capital that tech companies need to spur new growth into new sectors. In addition, as the higher rates slow the economy, it reduces the profitability of the companies, whose products can be less necessary to day to day living for consumers than other necessities like food and clothing.
This has triggered more selling of tech stocks this week. Meta, AMD, Intel, Alphabet, Nvidia, Microsoft, Amazon, and Spotify all were down over the week as the Nasdaq dropped over 5% through the week.
Butterfield noted, “The open question for investors is still: Do we see a change in demand and therefore an actual change in performance? Because the multiples are probably about good, and if we collectively determine that we’re not going to see a real decrease in demand, we’re not going to see a real decrease in economic growth, then I think we have a lot of upside from here.”
Butterfield noted, many investors may also not be closely looking at the fundamentals of these companies, which may be more solid than they would think.
Goldman Sachs managing director Eric Sheridan noted the volatility is a tremendous factor determining valuations. He said in an interview, “What tech investors want is visibility into a calm economic environment. Tech, by its very nature, is a risk-premium, risk-on category of investing, and when people are uncertain about what’s the rate of inflation, what’s happening in the macroeconomic environment, what is the Fed going to do — it all trickles into the conversation and it creates uncertainty. As a result, risk comes off, and names sell off in the group. So you really need a stable macro environment where people feel comfortable putting more risk back on in their portfolio.”
