The Appen Ltd (ASX: APX) share price is down today amid the sell-off in US equities markets that unfolded while the ASX slept.
Shares of the data solutions and services company are currently trading 2.11% lower at $3.71 each. Today's loss means Appen shares have lost 21% in the past month and 67% year to date.
The S&P/ASX 200 Info Technology Index (ASX: XIJ) is one of the worst-performing ASX indices today, currently down 3.69%.
Other ASX tech shares trading lower today include Weebit Nano Ltd (ASX: WBT), down 1.19%, and Life360 Inc (ASX: 360), down 6.36%.
Let's peel back the curtain a bit to understand what's happening with tech stocks amid the sell-off.
Image source: Getty Images
Tech stocks and the sector rotation
It may pay to revisit some history to surmise where tech stocks could head in the future. Tech stocks, including Appen, went through a sector rotation near the end of 2022 and have performed poorly ever since.
Now the headwinds of inflation and rising interest rates seem to be really kicking in. The S&P 500 Information Technology Index lost the most of all US indices overnight.
Rising interest rates make a company's debt more expensive in the form of higher interest payments. Tech stocks can carry particularly heavy debt along with negative earnings while working towards breakeven profitability.
These factors can make tech stocks riskier to invest in and, with a deteriorating outlook for the near future, less appealing than other forms of investment.
How interest rates can change a company's valuation
Another factor is that interest rates are a key fundamental used in financial modelling to predict a company's fair value, such as in the popular — and controversial — discounted cash flow (DCF) model.
More specifically, interest rate fluctuations change the company's weighted average cost of capital (WACC), which is often used as the model's discount rate. When the discount rate increases, the theoretical value of the company goes down and vice-versa.
This effect is amplified for shares that already trade at premium valuations, which for a long time accounted for big tech FAANG stocks such as Alphabet Inc. (NASDAQ: GOOGL), Apple (NASDAQ: AAPL), and the like.
Investors are likely now rushing into "risk-free" safe havens, such as bonds and treasury bills, to escape the madness of the selloff in equities markets at present.
Although, time will tell if more speculative tech shares can make a recovery in the near future.
