Technology Growth Stocks - A Time of Assessment and Opportunity

Whether we are in an economic recession is still up for debate, but technology growth stocks are certainly in a Bear Market as interest rates surge and investors have become highly risk averse. And how far we’ve fallen – from late 2021 as tech stocks struggled to maintain the post-pandemic highs in a near zero interest rate environment, to the indiscriminate downdraft across stock prices in Q2 2022, technology growth stocks, which were the disproportionate winners of the COVID era, are now down over 40% on average. Even public software businesses with the strong growth and forward revenue visibility of SaaS models have dropped from trading at inflated 15-20x revenue multiples to around 5-8x as the market reprices. Valuations of the 2020 and 2021 cohort of tech IPOs and de-SPAC’s alike have plummeted and are still struggling to find a new trading range. None more so than “profitless tech” (the more speculative, unprofitable companies).

Investor demand has waned as the buy side awaits earnings reports and potential announcements of earnings revisions and slower forecasted revenue growth from public companies. Right now, the Fed owns the tape and investors, most of whom have taken profits and rationalized and rebalanced tech portfolios in the 1H, are now assessing the outlook for companies and re-underwriting their investment models for both a lower base case and downside scenarios. Early-stage venture investing with a long-term horizon remains somewhat active at lower valuations, while growth equity investors and public institutional investors have paused deploying capital while they re-evaluate the outlook for technology companies.

Corporate sellers continue to have high expectations for valuations, which are disconnected from current market reality. Acquisitive tech companies expect that target companies will become cheaper to acquire in the future. As one prominent growth investor shared with us recently, “until board rooms and management teams have their 52-week highs firmly and far in their rearview mirror, we will struggle to make markets and transact even in the private tech market.”

In this environment our core focus in Technology Investment Banking has been our client base, which has been made significantly larger by the 75+ newly minted public companies we’ve brought to the public markets over the past few years. We’re simultaneously reallocating time to building relationships with the next cohort of pre-IPO companies to position ourselves for a market recovery while also investing in refreshing, resourcing, and retraining our junior banking team and its capabilities. It is a fair generalization to say that high growth tech companies emerged from 2020 and 2021 with strong balance sheets and enough capital to fund themselves to profitability in 2023 and 2024. More established tech companies have built a war chest to put to work making acquisitions to fuel inorganic growth as organic growth slows.

Our banking team is mature and experienced, and most of our senior bankers have worked through two or three bear markets over the course of their careers, so we understand how to manage and thrive in the current market environment. We’ll be applying that experience to help clients and prospective clients manage through this bear market. We remain bullish on the wealth creation opportunities in the tech sector and are looking at several investment opportunities with attractive entry points for our Private Market Opportunities platform. We expect to emerge from this challenging environment with stronger client relationships, and are primed to service the growth capital and advisory needs of tech companies in the next upcycle.