As the outlook for higher interest rates and a slowing U.S. economy continue to hammer markets, tech stock valuations have crumbled. Slack founder Stewart Butterfield said that the valuations on great businesses will be too tempting for investors to ignore.
The tech industry executive told Yahoo Finance Live that the multiples have probably come down to something that looks pretty reasonable, according to a longtime tech industry executive. Slack was acquired by Salesforce in 2021 for $27.7 billion and has played a starring role in Dreamforce with new platform innovations such as Canvas.
Butterfield acknowledged that the last six months have been rough for the technology sector. In September, the Federal ReserveFederal Reserve raised interest rates by 75 basis points for the third time since June. Higher interest rates increase the cost of capital for tech companies that thrive on new funding to spur growth. With rates on a steeper trajectory, the economy could slow faster than expected and put pressure on higher tech multiples, as the Fed indicated on Wednesday.
Tech stocks experienced a new round of selling this week. Popular tech stocks such as Meta, AMD, Intel, Alphabet, Nvidia, Microsoft, Amazon, and Spotify saw declines as the Nasdaq Composite fell more than 5% during the week.
The open question for investors is: Do we see a change in demand and an actual change in performance? Butterfield said so. I think there is a lot of upside from here because the multiples are probably good, and if we decide that we are not going to see a real decrease in demand, we're not going to see a real decrease in economic growth. The Goldman Sachs Communacopia Technology Conference took place earlier this month, and investors want visibility into a calm economic environment, according to Eric Sheridan, Goldman Sachs' managing director.
It's a risk-premium, risk-on category of investing, according to Sheridan. When people are uncertain about 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 creates uncertainty. Risk comes off and names sell off in the group. It's important to have a stable macro environment where people feel comfortable putting more risk back into their portfolio. You can follow Sozzi on Twitter and LinkedIn.