Tech valuations have endured stark declines this year. But after continued selling, it’s now possible to argue that the selling has gone too far — that tech valuations are now suffering more than is warranted in the wake of the 2020-2021 tech stock bubble.
U.S. stocks opened lower today again, adding to a miserable year’s trading. Technology shares, in particular, have endured a rout since reaching all-time highs in late 2021, much of which made sense.
After all, software companies saw their worth rise not only on the back of growth during the pandemic, but also thanks to expanding revenue multiples. Those multiples stretched into the stratosphere, so seeing them compress now that the market’s ebullience has worn off is what we’d expect.
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But the sell-off has now, in some cases, pulled the value of software companies below their pre-COVID price points. This means that select tech concerns are now worth less than they were before the pandemic despite having a few years of growth in the bank.
With that in mind, here’s the one-chart argument that tech valuations have paid their dues and then some since November 2021 highs:
As you can tell, the TechCrunch Technical Analysis Team annotated the chart for us this morning.
Regardless of their color choices, we can see that Okta is now trading at early 2019 prices, below what it was at before the pandemic began, let alone where its share price managed to climb to last year. This 2019-2022 share price parity allows us to compare Okta’s early results from both years to see how much the authentication and identity company is enduring a potentially unfair1 shellacking.
However, as Okta doesn’t report its Q1 2022 results (Q1 fiscal 2023 at the company) for another few weeks, we have to make do with a slight offset in compared quarters:
Q1 2019 Okta results (Q1 fiscal 2020):
- Revenue: $125.2 million, up 50% year over year.
- GAAP net loss: $52.0 million, up 100% year over year.
- Free cash flow: $13.2 million.
Q4 2021 Okta results (Q4 fiscal 2022):
- Revenue: $383 million, up 63% year over year.
- GAAP net loss: $241 million ($115 million from the Auth0 acquisition).
- Free cash flow: $5 million.
In short, Okta is growing faster in its most recently reported quarter than it was back in early calendar 2019. Sure, its net loss is bigger due in part to share-based compensation costs and an acquisition, but Okta’s free cash flow was still positive. It’s also about three times as large. But it is now worth less today than it was back then. Chew on that.
That’s the one-chart argument that the tech sell-off has gone too far. I am sure Okta isn’t thrilled that we used it as our example, but the chart was perfect, so here we are.
- A word on unfair: There is no fair in business, naturally. It’s not a place where such words are a good fit. What we mean by fair is reasonableness, mostly. If things made sense pre-bubble, comparing their post-bubble reality to that prior period is reasonable. Now, if your view is that even in 2019 tech stocks — and software companies, more specifically — were already over-valued, then you might consider this post too kind.
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