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The GME insanity has made me reconsider my view on big tech monopolies and fix common issues in traditional discounted cash flow models
1 -Capital structure and cost of capital
Because big tech is debt-free, the cost of capital is derived from CAPM - Apple's is at 9.5%
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1 -Capital structure and cost of capital
Because big tech is debt-free, the cost of capital is derived from CAPM - Apple's is at 9.5%
1/6
Absurdly high WACC are offset by even crazier consensus LT growth estimates which lead to the nonsensical result that 'g' > 'r'
--> analysts should adjust the two numbers
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--> analysts should adjust the two numbers
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I took 3 steps
- "re-lever" the balance sheet to normal levels
- Adjust the cost of equity to HY bonds' yields + 2.5%
- Adjust long-term growth to 2.5%
With this Apple's current valuation looks justifiable
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- "re-lever" the balance sheet to normal levels
- Adjust the cost of equity to HY bonds' yields + 2.5%
- Adjust long-term growth to 2.5%
With this Apple's current valuation looks justifiable
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Then there is the question on intangible assets (rarely recognized under GAAP) and R&D costs (usually expensed, rather than capitalized)
Treat R&D as a capital expense with infinite depreciation and big tech stocks trade at about 26X EPS, not far form the market
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Treat R&D as a capital expense with infinite depreciation and big tech stocks trade at about 26X EPS, not far form the market
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5/6 finally, big tech is increasingly trading like risk-off sectors, outperforming on down days. That diversification potential justifies higher multiples, especially in a world of financial repression
All this does not change the fact that ALL BIG TECH STOCKS CANNOT GROW INTO THEIR VALUATIONS, and that 60/40 PORTFOLIOS WILL DELIVER NEGATIVE REAL RETURNS IN THE NEXT DECADE.
But then everything is relative... Big tech stocks are not the worst, relatively.
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But then everything is relative... Big tech stocks are not the worst, relatively.
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