Are The Tech Giants Trading Like Bonds?

The tech giants are trading at valuation ratios that are close to unprecedented for such large companies. Currently, Amazon (AMZN) trades at a nosebleed price/earnings multiple of 122. Apple’s (AAPL) multiple is 33 which is extraordinary for a hardware manufacturer. Netflix (NFLX) clocks in at 84. Tesla (TSLA) leads the pack at 752, but that is largely due to its miniscule earnings. Overall, it is hard to look at these valuations without thinking “bubble.” But there is another interpretation.


Tech Giants Trading As They Were Quasi-Bonds

At Cornell Capital Group we asked: What if the major tech giants (and I would exclude Tesla from this group) are trading as if they were quasi-bonds? That is a combination of their technology, their market power, and the impact of COVID is such that their projected earnings are virtually locked-in. They are largely immune from the risk of competition and the fluctuations in the economy. If that were true, then the discount rate may be a good deal lower than that implied by traditional asset pricing models. To get an idea what this means, let’s go back to the basics.

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The starting point for constructing any discount rate is the risk-free rate of interest. For valuing common stocks, this is taken to be a longer-term rate. The most popular choice is the 10-year Treasury yield. Exhibit 1 below plots the yield of the 10-year Treasury over the course of 2020. The exhibit shows that COVID, and the government response to it, led to a decline in the yield from 1.88% at the start of the year to about 0.60% during the last several months. At that yield, if one were to calculate a P/E ratio for the Treasury bond it would be 167.

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DISCLAIMER: CORNELL CAPITAL GROUP LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE ...

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