Why the Appen (ASX:APX) share price is falling today

The Appen Ltd (ASX: APX) share price is sliding today, currently trading 4.58% down at $8.54.

In fact, Appen shares have been swimming in a sea of red this year to date, beginning their sharp descent in February.

Curiously, there’s been no market-sensitive news out of Appen’s camp today that might impact its share price.

So let’s take a look at what’s behind the downward pressure on the technology company’s shares lately.

What’s up with the Appen share price today?

To answer this question, we have to cover why ASX tech shares in particular have absorbed the latest tremble in global markets.

Appen shares are leading the loss for the broader sector today with the S&P/ASX 200 All Technology Index (XTX) also falling 2.6%.

The index has seen headwinds of late, spurred on by a hike in US Treasury bond yields and a corresponding rotation of capital away from high-growth tech shares.

This is important for a number of reasons.

In layman’s terms, the yield on a US government or Treasury bond (or any bond) is just the annual interest rate an investor earns after purchasing the security.

The way it works is when you buy a US Treasury bond, you are, in effect, loaning the US government a set amount of money.

In turn, the government will pay you interest at a specified yield/rate and then return your principal at a future date.

US government bonds are seen as extremely safe assets, given the unlikely odds the US government will default on its debt. So the yield on these is seen as a benchmark for other rates, also known as the ‘risk-free rate’.

This rate is essential in the financial mathematics involved with asset valuations and also has an inverse relationship with investors’ risk behaviour.

Basically, as bond yields rise, investors tend to wind back the amount of risk they have on the table and place their capital somewhere else – usually by buying ‘safer’ assets over speculative, growth-type tech shares.

One reason is that they know they can get a reasonable rate of return in more predictable asset classes.

But why else does this hurt tech shares?

The other major reason why a rise in US Treasury yields is a problem for tech shares boils down to share valuations and how the market allocates capital based on them.

When experts value an asset, such as a company’s shares, they try to forecast how much cash/return they can produce into the future and value that in today’s terms.

A part of the financial mathematics involved uses the US Treasury yield to do so.

In a nutshell, the higher the yield, the lower a share’s valuation, and vice versa.

The effect is particularly harsh on growth-type companies, given their forecasts of massive profits into the future. It also dampens the valuation of Appen’s future dividend stream.

Many tech shares – like Appen – fall into the growth category and are, thus, impacted disproportionately when these events happen. As financial theory states, this is because many assets that are ‘overvalued’ can correct down towards their ‘fair value’.

As such, investors tend to allocate their hard-earned capital towards industries, sectors and even asset classes with what they perceive as more ‘respectable’ valuations to avoid ‘catching the falling knife’.

Honing in on what’s happened recently, the yield on the 10-year US Treasury bond – the standard proxy in these calculations – has spiked lately.

On 20 September, it ticked up from 1.30% to a fresh high of 1.53% nine days later which caused a pulse through share markets these past few weeks.

It’s since crept down a fraction to 1.49%. Nonetheless, the corresponding effect has been realised in ASX tech shares and in Appen’s share price.

The Appen share price has continued to slide more than 5% since US yields made the jump. Meantime, the ASX All Technology Index has slumped 6% in this time.

This is despite no market-sensitive news from the company.

Foolish takeaway

With a rise in US Treasury yields, this tends to impact investor behaviour and hurt the valuations on high-growth tech shares.

Investors will shift their capital to more stable investments that offer a reward from the increased yield whereas share valuations are compressed if yields increase.

Appen shares have been on the down lately which appears to have been spurred by a recent rise in US Treasury yields and weakness in the broader ASX tech sector.

The post Why the Appen (ASX:APX) share price is falling today appeared first on The Motley Fool Australia.

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The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Appen Ltd. The Motley Fool Australia owns shares of and has recommended Appen Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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