Was tech’s ‘bull run’ simply a temporary surge?

For a few months this summer, it seemed that the trend of falling tech valuations was nearing an end. The U.S. pausing interest rate hikes, falling inflation in key markets, and software companies’ slowly rebounding revenue multiples led to a trio of IPOs that were both long in the coming and very welcome in their arrival.

Though Arm, Klaviyo and Instacart all priced their IPOs strongly and traded well in their first few days on the market, their shares have since stalled. Instacart’s stock is now trading below its IPO price, and Klaviyo and Arm have given back much of their earned gains in recent days.

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It’s very possible that we will not see more IPOs for some time. Several factors converged to help these companies go public, but those trends have largely reversed. Another interest rate hike is expected this year, and the 10-year Treasury note’s yield is so high, it’s reached levels we haven’t seen since 2007 — it’s only reasonable, then, to expect low-risk investments to remain attractive or even grow more alluring. That would maintain the pressure on tech stocks, especially those focused on growth instead of profitability.

This is bad for tech startups, because anything that hampers investors’ enthusiasm for tech stocks eventually affects the private market. Less demand for tech equity could limit IPOs, yes, but it will also make it harder for startups to raise money at all, let alone at attractive prices. And late-stage startups, which are most sensitive to the stock market, will be under even more pressure than they are struggling with already.

Autumn blues

Here’s where we were in June, when things were much sunnier:

New public market data indicates that software stocks are rising to their highest points so far this year. To make it sweeter, the underlying revenue multiples at public companies are expanding as well, especially at the faster growing subset of software companies. . . .

Have all software stocks recovered from a difficult six months of trading, at least when it comes to their multiples? No. However, we can see a clear change in investor demand for shares of companies that are growing at a decent clip or faster.

Market enthusiasm for AI-related products and the revenue they’d drive has helped keep tech prominent this year. It appears, however, that even AI excitement cannot keep some tech companies from losing their gains.