I follow the public markets quite closely and I am interested in building valuation models. In the past, the rule of thumb was that 10X revenue valuations was reserved for the best companies. See Bill Gurley's seminal post on this:
The valuation of the best public SaaS companies has gone up substantially, much faster than the rate of growth of their revenues. See:
Example: Shopify trades at about 20X revenues whereas just a few years ago it traded at 10X revenues. You can go through the list and see this multiple expansion for a wide swath of companies (similar analysis can be done for other industries and for good companies this multiple expansion still holds). There is no rule of physics that states that good companies should be valued at 10X. All these rules come from the emergent rules of the world economy. But if the underyling assumptions change it is possible that the rule does not hold any more.
The question on my mind is quite simply: are we in a bubble or is this normal? I have been trying to read about this for sometime; trying to understand the impact of QE and interest rates.
To kick this discussion off, I'll focus just on negative yielding debt which is at a record high of $12T WW:
There is a lot of concern that negative interest rates are bad and will have terrible side effects.
Having thought about this for some time, my leading hypothesis is as follows:
1. I don't see that big a difference between negative rates and inflation. Negative rates are more psychologically disturbing as we have never seen them. But inflation does the same to cash.
2. There is possibly a very positive underlying long term trend. From every measure we live in the best time in human history:
Could the negative interest rates really be a reflection of the fact that we have made great progress on the more well defined problems (reducing poverty, reducing infant mortality rate, etc) which have more predictable returns to them and that capital really needs to move to more unclear/riskier innovation (clean energy, space travel, etc)? I also wonder if the fact that negative rates have not spurred growth in the EU is also a reflection of risk taking appetite in the local economy; there have to be entrepreneurs who will be willing to taking crazy risks (when cost of capital is low) to invent the future, not just "distributors" who succesfully match supply to demand of known goods and services?
I don't know if I am on the right track and would love for people who study this to educate and debate the issues. I have more data that I am happy to share if this panel grows.
@Chris : are there people in the Cake community who are knowledgeable and can weigh-in on this topic?