Tech valuations have come down to pretty reasonable levels, Slack founder says

Sep 23rd, 2022 16:21 EST

Tech stock valuations have crumbled as the outlook for higher interest rates and a slowing U.S. economy continue to hammer markets. But they can't keep falling forever.

And Slack Founder Stewart Butterfield hinted that pretty soon, the valuations on great businesses will be too tempting for investors to ignore.

“The multiples have probably come down to something that looks pretty reasonable,” the longtime tech industry executive told Yahoo Finance Live at Salesforce's Dreamforce conference. Slack, which was acquired by Salesforce for $27.7 billion in 2021, has played a starring role at Dreamforce with new platform innovations such as Canvas.

Stewart Butterfield, co-founder and chief executive officer of Slack, waits to do a television interview after ringing the opening bell the New York Stock Exchange (NYSE), June 20, 2019 in New York City. (Photo by Drew Angerer/Getty Images)

Butterfield acknowledged that for the technology sector, “the last six months have been pretty rough.”

In September, the Federal Reserve raised interest rates by 75 basis points for the third time since June. Higher interest rates raise the cost of capital for many tech companies that thrive on new funding to spur growth. Further, with rates on a steeper trajectory, as the Fed indicated on Wednesday, the economy could slow quicker than expected and put pressure on elevated tech multiples.

Consequently, tech stocks experienced a fresh round of selling this week. Popular tech stocks such as Meta, AMD, Intel, Alphabet, Nvidia, Microsoft, Amazon, and Spotify saw declines as the Nasdaq Composite shed more than 5% during the week.

“The open question for investors is still: Do we see a change in demand and therefore an actual change in performance?” Butterfield said. “Because the multiples are probably about good, and if we collectively determine that we’re not going to see a real decrease in demand, we’re not going to see a real decrease in economic growth, then I think we have a lot of upside from here.”

In Butterfield's view, demand remains solid, underscoring the idea that investors may be missing good fundamental stories.

"What tech investors want is visibility into a calm economic environment," Goldman Sachs managing director Eric Sheridan told Yahoo Finance Live at the Goldman Sachs Communacopia + Technology Conference earlier this month.

"Tech, by its very nature, is a risk-premium, risk-on category of investing," Sheridan added, "and when people are uncertain about what's the rate of inflation, what's happening in the macroeconomic environment, what is the Fed going to do — it all trickles into the conversation and it creates uncertainty. As a result, risk comes off, and names sell off in the group. So you really need a stable macro environment where people feel comfortable putting more risk back on in their portfolio."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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