A comment from an analyst of JP Morgan has thrown a wrench into the technology stock valuation market. And while the impact of the message is felt most strongly among public companies, its effects could also be reflected in the valuations of non-private tech companies.
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The note changed the bank’s valuation perspective with regard to a number of technology companies. In response to what CNBC described as a “wave of downgrades” from JP Morgan, investors pulled the carpet on a few notable tech companies. Here’s a partial list of the damage from yesterday’s trading, after the downgrades were made public:
- Zscaler: -7.84%
- Data Dog: -6.54%
- Cloudflare: -8.98%
You get the picture.
But more importantly, the note linked rising interest rates with an expected decline in value of several technology stocks. To wit, “With rates rising, this adds risk to higher multiple software stocks trading more than 20 times revenue,” according to a CNBC citation of the note. (A longer list of upgrades and downgrades from the communiqué can be found here.)
If tech companies worth more than 20x revenue see their valuation fall as interest rates rise, it would create a downward compression effect on technical valuations in general. Simply put, if the tech companies with the highest valuations were dragged closer to a multiple of 20x, that would lower the value of nearly every tech company, period.