ASX tech shares are in a world of pain. There might be more to come...

ASX tech shares are in a world of pain. There might be more to come…

Why are ASX tech shares like Afterpay ASX: APT) and Pro Medicus Limited (ASX: PME) selling off today? Perhaps its once again about inflation

Sebastian Bowen

Author Bio Sebastian Bowen has been a Motley Fool contributor since late 2018. Sebastian found his passion for writing and educating others about shares and all things finance after completing his studies in political, economic and social science and enjoys bringing this passion to life at the Fool. His investment philosophy is a simple one – buying high-quality companies at prices that make sense. When he’s not researching his next investment at all hours of the morning, Sebastian enjoys classic movies and likes to unwind with a good book, newspaper or record. Areas of Expertise Dividend investing ETFs Education Bachelor of Political, Economic, and Social Sciences (Government and International Relations), University of Sydney Social Media X/Twitter Favorite Investment Quote "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." – Benjamin Graham

Published May 7, 2021 2:09 pm AEST

ASX tech shares are in a world of pain today. We are seeing substantial sell-offs in most of the dominant tech shares on the market as we wade through Friday trading. Take Pro Medicus Limited (ASX: PME). Its shares are leading the S&P/ASX 200 Index (ASX: XJO) losses today, down a hefty 8.53% today to $42.03. Or Afterpay Ltd (ASX: APT), which is selling off with a 5.85% loss to $93.59 a share. Xero Limited (ASX: XRO) has lost 2.41% today, whilst WiseTech Global Ltd (ASX: WTC) is down 1.75%. Bucking the trend is Zip Co Ltd (AX: Z1P), whose shares are actually in the green today, up 1.4%. As well as Appen Ltd (ASX: APX), which is enjoying a hefty 5.3% gain today. Saying that Appen dipped to a multi-year low yesterday after a 20% sell-off, so that's not as good as it seems for Appen shareholders.

So why such a brutal sell-off today for ASX tech shares?

Well, it appears to have been somewhat sparked by a savage sell-off overnight for certain tech shares on the US markets. Shopify Inc (NYSE: SHOP) was down 2.6% last night. Square Inc (NYSE: SQ) lost 3.4%, while Palantir Technologies Inc (NYSE: PLTR) lost 5%, and Coinbase Global Inc (NASDAQ: COIN) shed close to 6%.

So what's going on here?

Female investor in front of computer with hands at forehead. — Image source: Getty Images

ASX tech shares in savage sell-off

Well, it could be a result of renewed inflation concerns. Inflation has been back at the centre of the investing world of late, given the robust economic recovery that many countries, including the United States and Australia, are currently enjoying. Even Warren Buffett mentioned inflation in his recent annual meeting for Berkshire Hathaway Inc. (NYSE: BRK.A)(NYSE: BRK.B).

Buffett didn't mince words, saying: "We're seeing very substantial inflation… It's very interesting. We're raising prices. People are raising prices to us and it's being accepted".

So why are these kinds of ASX tech shares feeling the pain today, while at the same time the ASX 200 is rising? Well, with inflation usually comes interest rate rises. And these companies are by far the most vulnerable to that paradigm, should it occur. That's because they are still well within their 'growth phases'. These tech companies typically have a lot of debt and very little present cash flow. That's fine of course, they are investing for future growth and cash flow.

But right now, with interest rates to near-zero, debt is essentially free. If inflation comes and rates rise, it will no longer be free. That might be what has gotten the market worried about these ASX tech shares today.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.