Shares in Megaport Ltd (ASX: MP1) have started the year poorly and are now down 4.95% for the week at the time of writing.
The plunge extends a 13.82% downward wave that Megaport shares have ridden into over the last month, alongside weakness in the broad tech sector.
Updates out of the global provider of interconnection services' camp have been sparse during this time and there's been nothing price-sensitive to comment on.
Image source: Getty Images
Why is the Megaport share price under pressure?
In order to paint the picture of what might be underlying the movement in Megaport's share price, we have to look at the market mechanics behind it all.
More broadly, the S&P/ASX All Technology index (XTX) has been lumpy across the past month as well and is down 3% in that time after plunging 6% in the past week.
Part of the sector-wide selloff in tech stocks is driven by the US Federal Reserve's recent talks on potentially raising rates earlier than expected this year.
A quick rewind here for context. Early in 2021, Fed' chair Jerome Powell said it would not be targeting interest rate and/or yield curve hikes until 2023 or 2024 in wake of the COVID-19 pandemic.
However, amid global supply chain disruptions and manufacturing bottlenecks bought on by the pandemic, inflation statistics were well above global targets in 2021. Fourth quarter inflation in the US alone was 6% year on year for example.
Central banks use variables like interest rates to control the level of inflation in the economy. With inflation soaring in the US, the Fed has little choice but to dial up interest rates in order to wind down surging prices in the real economy.
The problem is that a low interest rate environment is fantastic for asset valuations. It boils down to the mathematics in how assets are valued, says the CFA Institute, but in simple terms, analysts use certain interest rates to value and price stocks.
A rising rate/yield on the 10-year US Treasury note – a proxy to use in asset valuations – for instance, would compress stock valuations, whereas a lower yield sends them higher. These valuations in turn have a considerable impact on share prices and how the market allocates capital.
Global share markets have enjoyed a period of record low interest rates for the past 10 years following the global financial crisis (GFC). Government policy has been to promote credit and liquidity in that time.
As such, high-growth tech stocks have flourished during that time, because investors have grown their risk appetite in response. In effect, they paid a premium 'today' to purchase a slice of growth into the future, according to the Nasdaq itself.
Fast forward to today and the outlook isn't as rosy. Hence the Fed needs to hike rates in order to rein in inflation, which in turn is a net-negative for high-growth tech stocks across the board.
Even though higher rates hurt the valuations on assets like stocks, the impact is disproportionate to unprofitable tech companies that may be trading at a premium.
This explains why the broad ASX tech indices are down following the Fed's most recent meeting and the release of its minutes this week, according to analysis from Bloomberg Intelligence.
Megaport, being a constituent of the tech sector in Australia, is likely to be impacted by the spillover from this negative momentum.
Especially as there have been no price-sensitive updates from the company this past month that indicate anything has changed for the company fundamentally.
The pressure extends sector wide to the ASX tech basket to start off 2022.
Megaport share price snapshot
Despite the recent weakness, the Megaport share price has climbed 37% in the past 12 months. Last year was a positive one for the company, with many inflection points sending its share price to new highs.
Zooming out over an even wider time frame, then Megaport is trading near its all-time highs which it nudged past in November 2021.
As such, it has outpaced the benchmark S&P/ASX 200 Index (ASX: XJO)'s return across each of these longer-term time frames.
