To value companies valuation models are used which have two very sensitive inputs: growth rate and risk-free rate. Usually the growth rate dominates the swings that come from reporting season, so when growth misses the mark stocks tend to drop significantly, and vice versa when growth rates are higher than the market expected. This is amplified for tech stocks which are priced for FUTURE earnings, not current earnings.
Growth rate hasn't been an issue for APT and more recently its the "risk-free rate" that's causing the drop. As the risk-free rate increases, the risk-reward ratio of holding highly volatile tech stocks decreases.
In layman's terms, you'd be more likely to put your money into the share market (which historically provides around 8% return) when a savings account is paying 0.1% compared to when the savings account is 5%. That's because the 5% is risk free and not far off from the 8%. Again, this notion is amplified by tech stocks because of their forward-looking valuations.
Hence why we see a rotation out of tech in a preemptive reaction to the possible faster-than-expected increase in interest rates. Fundamentals matter very little here, because as I mentioned in an earlier post a company can be valued significantly different when the risk-free rate is 0.5% compared to a higher rate like 2% or 5% even if the company is fundamentally the same.
APT Price at posting:
$103.40 Sentiment: Hold Disclosure: Held
