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Software Stocks Pummeled Even Harder Than Rest of Tech Market

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·2-min read
Software Stocks Pummeled Even Harder Than Rest of Tech Market
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(Bloomberg) -- Software companies that delivered fantastic returns in recent years have lost more than half of their value since hitting peaks last fall.

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Lockdown darlings Zoom Video Communications Inc., DocuSign Inc., Snowflake Inc. and Asana Inc. each experienced double-digit gains during the pandemic then crashed this year.

While most of the market has been in decline in recent weeks, makers of computer applications and data-storage solutions have seen even steeper losses. The iShares Expanded Tech-Software Sector ETF is on track for its longest streak of weekly drops since 2001, and is down 38% from a November peak, compared with a 24% fall for the Nasdaq 100 Index, which includes a broad swath of the technology industry.

Software firm valuations are being hurt by rising interest rates and a reversal of Covid-related trends that boosted tech, said Rishi Jaluria, an analyst at RBC Capital Markets. High-multiple or unprofitable companies like Asana were particularly susceptible to these changing economic circumstances, he said.

These software makers became investor favorites throughout the pandemic, when US growth was limited to a handful of sectors. Though sales continue to rapidly increase at many of these companies, profitability is more important when interests rates are rising, Jaluria said. “Growth at all costs is not OK anymore.”

Read more: High-Flying Startups Feel the Pain of a Long-Predicted Downturn

It’s not just new high-growth firms that are suffering. Enterprise giants have plunged as well. Adobe Inc. shares declined 28% this year through Tuesday’s close. Salesforce Inc. dropped 36%, Microsoft Corp. fell 21% and Oracle Corp. slid 18%. Investors have fled even after Salesforce and Oracle delivered bullish revenue forecasts during their most recent earnings reports.

Despite broad economic pressure, software companies’ pain may be near an end, according to Morgan Stanley’s Keith Weiss. As prices have fallen, investors now view these companies as fairly valued and some short-sellers are no longer betting the prices will go much lower, he wrote in a research note Monday.

Not everyone agrees. BMO’s Keith Bachman wrote in a note Tuesday that share prices of software providers could fall further, even if valuations have come back to long-run averages.

“We continue to have concerns about valuations given the backdrop of continued rising rates and very real threat of Europe, if not broader global economy, entering a recession,” Bachman wrote.

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