An analyst note from JP Morgan has thrown a wrench into the valuations market for technology shares. And while the impact of the missive is being felt most sharply among public companies, its impacts could show up in the valuations of yet-private technology firms as well.
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The note changed the bank’s valuation perspective regarding a number of technology companies. In response to what CNBC described as a “wave of downgrades” from JP Morgan, investors pulled the rug 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%
- Datadog: -6.54%
- Cloudflare: -8.98%
But what’s more important is that the note connected rising interest rates to an anticipated decline in the value of various technology shares. To wit: “With rates climbing, this adds risk to higher multiple software stocks trading over 20 times revenue,” per a CNBC quote of the note. (A longer list of upgrades and downgrades from the communiqué can be found here.)
If tech companies valued at more than 20x revenues see their valuations decline as rates rise, it would create a downward compression effect on tech valuations more generally. Put simply: If the tech companies with the richest valuations were dragged closer to a 20x multiple, it would slash the worth of nearly every tech company, period.