On slide 9, the author mentions that SaaS valuation multiples "have proven to be somewhat inversely correlated with rates."
That makes sense to me: The net present value or NPV of every dollar of earnings in the future is worth less when interest rates rise.
The natural question to ask is: How much can interest rates rise, e.g., in the US?
To answer that question, we should start by asking an easier question: How much have interest rates risen in the past during periods of high inflation -- say, from the mid 1970's to the early 1980's in the US?
According to the Federal Reserve's FRED database, 10-year and 30-year US treasury rates peaked at a mind-boggling ~16%, or ~8x greater than today's 10-year and 30-year treasury rates. Take a look for yourself:
If long-term treasury rates rise to a seemingly ridiculous 8x current levels, tech valuation multiples could come down by as much as 80% or 90%, because most of the profits of tech companies are generally expected to be earned in the very distant future. If long-term treasury rates to "more historically typical level" of say, 4%, or 2x today's levels, tech valuation multiples could come down by as much as half.
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[ 2.5 ms ] story [ 16.5 ms ] threadThat makes sense to me: The net present value or NPV of every dollar of earnings in the future is worth less when interest rates rise.
The natural question to ask is: How much can interest rates rise, e.g., in the US?
To answer that question, we should start by asking an easier question: How much have interest rates risen in the past during periods of high inflation -- say, from the mid 1970's to the early 1980's in the US?
According to the Federal Reserve's FRED database, 10-year and 30-year US treasury rates peaked at a mind-boggling ~16%, or ~8x greater than today's 10-year and 30-year treasury rates. Take a look for yourself:
https://fred.stlouisfed.org/graph/?g=MTuo
If long-term treasury rates rise to a seemingly ridiculous 8x current levels, tech valuation multiples could come down by as much as 80% or 90%, because most of the profits of tech companies are generally expected to be earned in the very distant future. If long-term treasury rates to "more historically typical level" of say, 4%, or 2x today's levels, tech valuation multiples could come down by as much as half.
Caveat emptor.