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It's hard for a bubble to burst when it's cheap to borrow money.

by ethbr0 5y ago

lotsofpulp 5y ago
Or maybe it is related to tech companies earning record profits year after year and obviating entire other businesses year after year. There is still much upside to be had, especially on the recurring revenue front.
- ethbr0 5y ago
  You're right. Uber obviated the need to pay for transportation. WeWork obviated the need to lease office space. The world will never be the same.
  - cupofpython 5y ago
    >WeWork obviated the need to lease office space Zoom has reduced leasing costs for many companies tbh
- mupuff1234 5y ago
  I don't think people are talking about the profitable companies, but about the endless list of companies who are valued at billions and have yet to turn a profit.
- time_to_smile 5y ago
  Someone on twitter once posed the question "what percent of the profits from profitable tech companies come from revenue from non-profitable ones?" I've found in looking at problems in general it helps to try to take a systems perspective. If you only look one step back everything makes sense and is fine, but when you start looking at the larger flows of everything is when you start to think that maybe the accounting doesn't all work out.
solveit 5y ago
Eight of the ten largest companies on the NYSE are tech companies (the others are Saudi Aramco and Berkshire Hathaway). Of those eight, only Tesla needs access to cheap capital. Edit: Tesla and Saudi Aramco (duh) aren't actually on the NYSE... Something something HN before coffee something Edit 2: Neither is Alphabet or Micros... you know what, just read publicly traded companies instead of NYSE.
- gabrielsroka 5y ago
  Nit: Tesla trades on NASDAQ, not NYSE. I think I know what you mean, but what are you really saying here?
  - solveit 5y ago
    Agh, I clicked the first google result for "NYSE by market cap" and it was something else. And of course Saudi Aramco doesn't trade on the NYSE either, that should've been more obvious. What I'm saying is that tech is a mature sector of the economy that is adjacent to but different from the startup world, and while cheap capital may inflate startup valuations, it's not the reason Apple or Alphabet are valued as they are.
- lumost 5y ago
  However the implied valuation of these companies is uneven. Tech company profits are valued at much higher multiples than Saudi Aramco or Berkshire profits. AAPL is a 2.73 trillion dollar company based on a 27x P/E ratio. higher interest rates will eat into these multiples. Given we are coming off of zero interest rates, it's unclear what the correct multiple is for any non-zero interest rate.
  - gen220 5y ago
    > higher interest rates will eat into these multiples Unless the potential for higher future interest rates were not baked into the quoted multiple. Interest rates are just one factor among many that go into a price. And they are among the most predictable. The biggest factor contributing to tech companies’ higher multiples is that every year they have come up with a new way to print money (especially AMZN and AAPL) for a decade running. To assign a lower P/E is, fundamentally, to discount that track record. Not that it’s a bad bet, but it doesn’t have much to do with interest rates, IMO.

It's hard for a bubble to burst when it's cheap to borrow money.

by ethbr0 5y ago

It's hard for a bubble to burst when it's cheap to borrow money.

Or maybe it is related to tech companies earning record profits year after year and obviating entire other businesses year after year. There is still much upside to be had, especially on the recurring revenue front.

ethbr0 5y ago
You're right. Uber obviated the need to pay for transportation. WeWork obviated the need to lease office space. The world will never be the same.
- cupofpython 5y ago
  >WeWork obviated the need to lease office space Zoom has reduced leasing costs for many companies tbh
mupuff1234 5y ago
I don't think people are talking about the profitable companies, but about the endless list of companies who are valued at billions and have yet to turn a profit.
time_to_smile 5y ago
Someone on twitter once posed the question "what percent of the profits from profitable tech companies come from revenue from non-profitable ones?" I've found in looking at problems in general it helps to try to take a systems perspective. If you only look one step back everything makes sense and is fine, but when you start looking at the larger flows of everything is when you start to think that maybe the accounting doesn't all work out.

solveit 5y ago

Eight of the ten largest companies on the NYSE are tech companies (the others are Saudi Aramco and Berkshire Hathaway). Of those eight, only Tesla needs access to cheap capital. Edit: Tesla and Saudi Aramco (duh) aren't actually on the NYSE... Something something HN before coffee something Edit 2: Neither is Alphabet or Micros... you know what, just read publicly traded companies instead of NYSE.

gabrielsroka 5y ago
Nit: Tesla trades on NASDAQ, not NYSE. I think I know what you mean, but what are you really saying here?
- solveit 5y ago
  Agh, I clicked the first google result for "NYSE by market cap" and it was something else. And of course Saudi Aramco doesn't trade on the NYSE either, that should've been more obvious. What I'm saying is that tech is a mature sector of the economy that is adjacent to but different from the startup world, and while cheap capital may inflate startup valuations, it's not the reason Apple or Alphabet are valued as they are.
lumost 5y ago
However the implied valuation of these companies is uneven. Tech company profits are valued at much higher multiples than Saudi Aramco or Berkshire profits. AAPL is a 2.73 trillion dollar company based on a 27x P/E ratio. higher interest rates will eat into these multiples. Given we are coming off of zero interest rates, it's unclear what the correct multiple is for any non-zero interest rate.
- gen220 5y ago
  > higher interest rates will eat into these multiples Unless the potential for higher future interest rates were not baked into the quoted multiple. Interest rates are just one factor among many that go into a price. And they are among the most predictable. The biggest factor contributing to tech companies’ higher multiples is that every year they have come up with a new way to print money (especially AMZN and AAPL) for a decade running. To assign a lower P/E is, fundamentally, to discount that track record. Not that it’s a bad bet, but it doesn’t have much to do with interest rates, IMO.