Adobe Systems world headquarters in downtown San Jose, California.
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By Adobe stocks had their second worst day of the year on Tuesday and stocks of other cloud software companies like Cloudflare and Zscaler jump back JP Morgan Analysts have issued a series of downgrades, citing high valuations.
In a software engineering outlook for 2022, JPMorgan analysts including Sterling Auty and Jackson Ader downgraded their ratings to 13 companies, while upgrading only five.
Reasons for the downgrade include a combination of limited upside to our price targets, pricing due to increased interest rate risk in 2022, rate adjustment, analysts wrote. discounting the current exchange rate environment and reassessing reasonable cash flow expectations”.
The threat of a rate hike in a high inflation environment has been troubling technology investors over the past month.
The Federal Reserve, within the framework of its two-day meeting on monetary policy, is expected announced a major policy change on Wednesday as the market anticipates the bond-buying program will taper off before rate hikes begin. A survey by CNBC Fed predicts the central bank will raise interest rates three times in each of the next two years, starting in June 2022.
Higher ratios tend to overwhelm tech companies because they feed into projections of future cash flow, which is an important metric for valuing growth stocks.
“With rates rising, this adds to the risk of many software stocks trading more than 20 times earnings,” wrote JPMorgan analysts.
JPMorgan stock downgraded
CNBC
Adobe is trading at 21 times revenue, according to FactSet. Before Tuesday’s 6.6 percent drop, Adobe stock was up 31 percent this year, topping a 20 percent gain in the S&P 500. That rally pushed the stock to $658.30, just for the sake of it. JPMorgan’s $680 bid, causing the company to downgrade its rating to buy-neutral.
“Adobe is one of the better-performing companies in our coverage in 2021, especially in the large-cap category, as the improvement in the pandemic-driven economic environment drives companies forward.” company buys digital advertising/marketing solutions to generate top revenue growth,” the analysts wrote. “The stock is currently only 10% below our target price, and as such, we are downgraded to a Neutral rating.”
Adobe’s biggest drop in 2021 occurred 11 days ago, when the stock plummeted 8.2%.
The two biggest declines following Tuesday’s report were shares of cybersecurity firms Zscaler and Cloudflare, which fell 7.6% and 9%, respectively. Zscaler was up 55% for the year, by Tuesday, and has a business value to revenue multiple for 2022 of 39. Cloudflare is up 91% and trading at a multiple of 61.
“We look closer to a rate tightening cycle as the Fed looks to keep pace with inflation and we expect that to have an impact on our most valued names,” JPMorgan wrote. especially as growth begins to normalize,” wrote JPMorgan, explaining its downgrade of Zscaler to sell out of hold.
As for Cloudflare, JPMorgan says the company could be the biggest revenue generator in its coverage within 10 to 15 years, because it positions itself as the “fourth cloud” after Amazon, Microsoft and Google.
However, because Cloudflare “is the most expensive stock in our coverage” and more software is expected to be compressed, JPMorgan said it is lowering its rating to sell off the stock.
Datadog Shares fell 6.5% on Tuesday after JPMorgan issued a similar downgrade. The company said the downgrade to the data analytics and monitoring company “is purely a call for valuations.”
Shares were up 75% this year before sliding Tuesday and trading for 61 times in revenue, according to FactSet.
