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

Appen shares lead the selloff in the broader tech sector today.
The post Why the Appen (ASX:APX) share price is falling today appeared first on The Motley Fool Australia. –

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.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

More reading

Analysts name 3 stellar ASX growth shares to buy

3 ASX 200 shares down more than 50% in 2021

How have the WAAAX shares performed so far this year?

Why these 3 ASX shares all hit 52-week lows today

The Appen (ASX:APX) share price just hit a 3-year low. Here’s why

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.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!