On 3rd Feb, Meta Platforms – Facebook’s parent company – lost $230 billion+ or 25%+ of its value on a single day, marking the largest one-day loss in the history of the US markets. The decline was largely driven by poor earning performance and weak guidance. While this may be termed as a one-off, company specific correction, there are several external factors – monetary included – that have caused the recent decrease in tech valuations in the US and India.
US FED expected to tighten monetary policy
The US Fed, along with a number of central banks around the world, are preparing to raise interest rates to combat rising inflation. This has caused most technology stocks, or so-called “growth stocks”, to decline over the last 2 months.
Technology companies have seen a record bull run over the last two COVID years, driven by increased demand for online solutions and services. However, a significant amount of investments in the public markets and the broader tech industry in general are fueled by “borrowed” money – the cost of which is nearly zero. With rising interest rates, the future valuation of these stocks become significantly lower, and results in a subsequent decrease in valuations.
It is yet to be seen how higher interest rates affect private investments – most Private Equity players in the tech space use a leveraged model for their respective investments. If money supply tightens, at the very least, we do expect the private markets to become more selective in their investment approach, relying on larger ticket size investments in the established tech players (or unicorns) rather than riskier investments in start ups.
India large and mid cap IT stocks decline by 10%
The Indian technology services market is facing similar headwinds. Most large and mid cap stocks have declined between 10-15%, despite record future demand projected by industry body NASSCOM.
While the recent decline in stock prices of many large cap players can be attributed to a broader market correction, long due after record bull runs in the latter half of 2020 and 2021, investors are concerned about the potential for future earnings growth and, whether the inorganic strategies employed these companies are accretive to their respective EPS metrics.
Attrition continues to be one of the biggest challenges for the IT services market (see our previous publication: The Great Indian Attrition). However, we expect that Technology services players will continue to outperform the boarder market as the fundamentals of doing business drives towards further digitization.