Adobe Systems world headquarters in downtown San Jose, Calif.
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Adobe’s inventory had its second-worst day of the yr on Tuesday, and shares of different cloud software program firms like Cloudflare and Zscaler plunged after JPMorgan analysts issued a sequence of downgrades, citing excessive valuations.
In a 2022 outlook report on software program know-how, JPMorgan analysts together with Sterling Auty and Jackson Ader lowered their rankings on 13 firms, whereas upgrading simply 5.
“The reasons for the downgrades include a combination of limited upside to our price targets, valuation in light of risk that interest rates rise in 2022, adjusting discount rates for the current rate environment and reevaluating reasonable cash flow expectations,” the analysts wrote.
The risk of rising charges in an setting of excessive inflation has been spooking tech buyers for the previous month.
The Federal Reserve, as a part of its two-day assembly on financial coverage, is expected to announce a serious coverage change on Wednesday because the market anticipates a tapering of its bond-buying program earlier than price hikes start. A CNBC Fed Survey predicts the central financial institution will increase charges 3 times in every of the subsequent two years, beginning in June 2022.
Higher charges are inclined to have an outsized influence on high-multiple tech firms as a result of they eat into future money stream projections, which is a key metric in valuing progress stocks.
“With rates climbing, this adds risk to higher multiple software stocks trading over 20 times revenue,” the JPMorgan analysts wrote.
Stocks JPMorgan downgraded
Adobe is buying and selling at 21 instances income, in accordance with FactSet. Prior to Tuesday’s 6.6% drop, Adobe shares have been up 31% this yr, topping the 20% acquire within the S&P 500. That rally pushed the inventory to $658.30, simply shy of JPMorgan’s $680 value goal, main the agency to cut back its score to impartial from purchase.
“Adobe has been one of the better performers across our coverage in 2021, especially in the large-cap category, as improvement in the economic environment coming out of the pandemic motivated companies to purchase digital marketing/advertising solutions to generate top-line revenue growth,” the analysts wrote. “The stock now stands less than 10% from our target price, and, as such, we are downgrading to a neutral rating.”
Adobe’s steepest drop of 2021 got here 11 days in the past, when the inventory plummeted 8.2%.
The two greatest declines following Tuesday’s report have been in shares of cybersecurity firms Zscaler and Cloudflare, which tumbled 7.8% and 9%, respectively. Zscaler had been up 55% for the yr, previous to Tuesday, and has an enterprise worth to income a number of for 2022 of 39. Cloudflare was up 91% and trades at a a number of of 61.
“We appear much closer to a rate tightening cycle as the Fed looks to catch up with inflation, and we do expect that will have an impact on our highest valuation names, especially as growth begins to normalize,” JPMorgan wrote, in explaining its downgrade of Zscaler to promote from maintain.
For Cloudflare, JPMorgan mentioned the corporate could possibly be the most important generator of income in its protection universe inside 10 to fifteen years, as a result of it is positioning itself to be the “fourth cloud” after Amazon, Microsoft and Google.
But as a result of Cloudflare “is the most expensive stock in our coverage,” and multiples in software program are anticipated to compress, JPMorgan mentioned it was decreasing its score to promote from maintain.
Datadog shares dropped 6.5% on Tuesday after JPMorgan issued the same downgrade. The agency mentioned that reducing its score on the information analytics and monitoring firm is “purely a valuation call.”
The inventory was up 75% this yr earlier than Tuesday’s slide, and trades for 61 instances income, in accordance with FactSet.