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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.

“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%.

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