Sign in

Is there a tech bubble?

With so much negativity around closed-up economies, city lockdowns, finding a vaccine, one can’t help but wonder why valuations — especially for tech firms — are sky rocketing.

Long term over short term

In any asset pricing exercise, there are two fundamental parameters to look at: future free cash flows and the discount rate.

Source: https://www.forbes.com/sites/bethkindig/2020/05/15/will-we-see-another-dot-com-crash-in-tech/#25ed75384998
Source: https://www.forbes.com/sites/bethkindig/2020/05/15/will-we-see-another-dot-com-crash-in-tech/#25ed75384998
“Is there a tech bubble?”
  • Just pure hokum.

Discount rates reflect opportunity costs

Government bonds have been widely accepted as the basis for pricing assets. It is considered to be default-free and therefore commonly used as the “risk-free” rate in valuation models. All cash flow valuation models that use the discount rate are based off this simple concept. At the peak of the dot com bubble, the 10-year treasury yield — which was the benchmark for a “safe haven” and a default-free investment — hovered at between 5 to 6%.

Engineer. Banker. Investor. Thinker. Builder. Writer. Illustrator. Troubleshooter. Light Bulb Fixer. www.kennyng.com