Friday, May 20, 2022

The falling stock prices of Paytm, Zomato and Nykaa: Learn more about the fall in stocks by the 6 questions below

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Paytm, Zomato, PolicyBazaar, and Nykaa — four Indian digital businesses that went public last year — all hit new lows on Monday, as economists forecast a global market correction as investors fret about the potential of increased interest rates in the United States.

Paytm’s stock sank more than 6% to $880 ($11.8) on Monday, the lowest level since the company went public in mid-November. The mobile payments company’s market cap has dropped to $7.7 billion, less than half of the $16 billion valuations at which it received $1 billion in a private fundraising round in the second half of 2019.

Nykaa’s stock fell more than 13% to $1,693 ($22.6) per share, down from an all-time high of $2,574 ($34.5). Zomato’s stock has dropped the most among the four IT companies, with a decline of more than 18.5 percent. From an all-time high of 169.10 ($2.27), the shares sank to as low as 91.7 ($1.23) each. PolicyBazaar plummeted over 9% to $766 ($10.2) per share, less than half of its all-time high of $1,470.

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The recent drop — which hasn’t had as much of an influence on other Indian equities — comes as shares of tech businesses that have surged in previous years amid the pandemic begin to show signs of “correction,” according to several analysts.

The surge has also aided businesses throughout the world in raising finance at record high valuations and rates. However, numerous investors are now publicly advising entrepreneurs that those days are coming to an end – at least for the time being.

Market sentiment changes quicker than firms can modify operations, cost structures, or monetization levers, said Shailendra Singh, a venture capitalist at Sequoia Capital India, in a tweet last week.

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He also noted that he anticipates a much-needed correction in the startup funding environment; happily, discussions have returned to revenues, products, unit economics, and cost-cutting.

Rajeev Misra, CEO of SoftBank Vision Fund, stated at an Axios conference last week that SaaS equities in the United States have dropped from 20 times sales to 12 times. According to him, private markets are still trading at 20x or greater… Over the next six months, he believes the margin will narrow.

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Some Questions that one may think:

Why are these stocks losing value?

Investors’ demand for highly valued digital and platform businesses has abruptly waned in India, following the pattern on the Nasdaq.

What’s the deal with Nasdaq’s sudden tech aversion and the outcome?

Because interest rates are expected to climb in the United States, with some investment institutions, such as Goldman Sachs, projecting that the Federal Reserve would hike rates four times this year alone. This means that US Treasury bond yields will rise, making them more appealing to a certain segment of the market.

What impact does this have on tech stocks versus other economic sectors?

Because tech stocks are considered ‘growth’ stocks, investors expect their revenues to expand at significantly faster rates than the rest of the market. However, investing in technology stocks is far riskier than, say, investing in equities of more established companies. That’s because the real growth of these growth stocks is generally far lower than the market’s optimistic expectations.

As a result, investors anticipate a particular rate of return to offset the risk they are taking.

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What factors go into calculating the rate of return?

This rate of return must be higher than the risk-free rate of return that an investor can expect to achieve without losing sleep. The yield on government bonds is the risk-free rate. For example, if the risk-free rate is 4%, investors can expect a return on their investment in tech companies of 6%, or 10%.

Is the sell-off solely motivated by the temporal value of cash flows?

Yes, to a degree. Because, as previously stated, investors anticipate a return that is higher than the risk-free rate. Simply because the risk-free rate of return rises (as interest rates rise), does not mean that tech company growth rates will climb in lockstep. Rising interest rates, in reality, harm a large part of the economy and cause spending cuts.

Furthermore, the cost of financing for tech companies will rise, reducing margins and, as a result, profits. When earnings decline, so does the price to earnings multiple that investors were ready to pay for these businesses previously, causing stock prices to fall.

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What about India’s stock market?

The bulk of India’s new age enterprises were benefiting from the market’s optimistic mood. Most of them have yet to make a profit and are unlikely to do so anytime soon in order to justify their exorbitant values. Investors are panicking and fleeing the market now that the mood has shifted for the worst.

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