Concerned that interest rates may increase for longer than anticipated, investors hammered cloud software stocks on Wednesday.
As soon as the Federal Reserve said it will raise its benchmark rate by 75 basis points, equities initially rose. But as Powell started speaking at the central bank’s news conference, the stock market’s gains were undone, and it dropped to session lows.
According to statistics, the “final level” of interest rates will be higher than the U.S. central bank had predicted, according to Jerome Powell, chair of the Federal Reserve.
Since investors prefer to own stocks with greater current earnings that are less dependent on future growth, cloud stocks have been especially susceptible to rising rates. Each of Bill.com, Twilio, and Cloudflare dropped 10% of its value on Wednesday, bringing their total losses for the year to at least 53%.
In order to combat rapidly rising food, energy, and other commodity prices in 2022, central bankers both domestically and overseas frequently increased interest rates. The risk is reduced for businesses that distribute cash dividends to shareholders, like IBM, the lone large-cap tech company that has increased in value this year.
The calculation is very different for businesses that are losing money, and many cloud stocks fall into this category. Values are derived from the current value of future cash flows.
Lower cash flows result from higher interest rates.
When interest rates were low, especially during the start of Covid-19 in early 2020, the demand for cloud software exploded and the price of the equities skyrocketed. Revenue at fast-growing businesses increased by a factor of two to three annually. But attitudes have shifted.
The WisdomTree Cloud Computing Fund, one index of cloud equities, is currently down 51% for 2022 after rising 110% in 2020. This year, the S&P 500 is down 21%.
The WisdomTree fund experienced its biggest loss since June on Wednesday, falling 7.5%. The S&P 500 sank 2.5%, while the heavily weighted Nasdaq Composite index fell 3.4%.
ZoomInfo, a company that provides data to salespeople and other employees, suffered the most. ZoomInfo’s founder and CEO, Henry Schuck, stated on Tuesday that the company has faced difficulties related to the macroeconomic environment while achieving a 46% year-over-year revenue rise.
Schuck stated on a conference call with analysts on Tuesday that as Q3 progressed, “we began to see increased macro pressure on deals, causing the level of deal evaluation to grow and sales processes to stretch further.” This began extremely late in the third quarter, therefore it little affected Q3 earnings.
This elongation trend persisted into Q4, and we do anticipate that it will have an immediate effect on growth. Qualtrics, CrowdStrike, and other cloud software companies have all experienced increased transaction scrutiny in recent months.
Paycom, a manufacturer of human resources software, reported its 33rd consecutive profitable quarter on Wednesday. Even yet, the stock dropped by approximately 8% on Wednesday.