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Are technology firms madly overvalued?

Posted by hkarner - 25. Februar 2017

Date: 23-02-2017
Source: The Economist: Schumpeter

Three financial sanity tests for whether there is a bubble

madly-overvaluedIS THE technology industry in La La Land? There are alarming signs. House prices in San Francisco have risen by 66% more than in New York over the past five years. Even at the height of the dotcom bubble in 2001, the gap was lower, at 58%. Shares of technology firms trade on their highest ratio to sales since the turn of the century. Four of the world’s most valuable firms are tech companies: Apple, Alphabet, Microsoft and Amazon. Snap, a tiddler with $400m of sales and $700m of cash losses in 2016, is expected to list shares on March 1st that will give it a valuation of over $20bn.

For companies and investors in any industry, it is hard to work out if you are living in a bubble. To help, Schumpeter has created three sanity tests for global tech firms. These examine their cashflow, whether investors differentiate between companies, and whether forecasts of their future earnings suffer from a fallacy of composition. The exercise suggests that tech valuations are frothy, but not bubbling. Den Rest des Beitrags lesen »

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