- There's "more pain to come" for the technology sector, billionaire investor Orlando Bravo told CNBC on Thursday.
- He said most software companies are unprofitable, and investors are questioning what they are paying for.
- The S&P 500's tech sector has dropped about 27% in 2022.
Technology stocks are vulnerable to further losses, with companies likely to disappoint investors about their profitability prospects in a difficult macroeconomic environment, private equity investor Orlando Bravo told CNBC on Thursday.
"I think there's more pain to come," for tech stocks, said the billionaire co-founder of Thoma Bravo, which specializes in software and tech sector investment.
He appeared on the same day that US tech shares were selling off. The move followed the Federal Reserve's interest rate hike a day earlier, the biggest increase since 1994. The Nasdaq Composite and the S&P 500's Information Technology sector each fell by nearly 4%, deepening their year-to-date declines.
Among large-cap tech shares, Apple gave up 3% during Thursday trade, and Amazon.com pulled back by 4%, with each facing year-to-date losses of about 27% and 38%, respectively. Microsoft fell more than 2% and was on course to log a 2022 decline of around 27%.
Investors have slammed tech stocks lower this year as the Fed's fight against inflation has translated into higher borrowing costs, and some investors see those as a threat to future profits. The Fed on Thursday raised its key rate by 75 basis points as consumer headline inflation hit a four-decade high of 8.6% in May.
While higher interest rates, inflation and a potential economic slowdown are hurdles, tech shares — particularly those of software companies — are being repriced "mainly because the industry has an operating problem," said Bravo.
"Most of the companies that are publicly traded in software are unprofitable. The average publicly traded SAAS software company loses money, negative 5% EBITDA margin," he said, referring to the software-as-a-service business model.
"So we've now gotten to the place of enough industry maturity where investors, given all these headwinds that they now see, are saying, 'I want profitability today.' And that is going through a major rerating," Bravo added without naming any companies.
He said the few publicly traded software companies that are profitable are down from a peak of 25 times EBITDA to 18 times EBITDA, which is in line with the declines in the broader stock market.
Meanwhile, unprofitable companies have veered down from 17 times forward revenue to five times forward revenue. And this is where he thinks more losses are likely in store for tech stocks as investors question what they are paying for.
"[When] those companies really start getting down to answering the investor question … the path to profitability, they're not going to love what they see. That requires a lot of cost reductions. It requires a lot of pain, and it's difficult to execute especially in a public setting," said Bravo.
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