One of the purported reasons for our high growth stocks declining recently has been the specter of higher inflation. This didn’t make sense to some on this board, nor to me. I think I finally found why analysts believe this.
Here’s an interview of Gary Black by David Lee. I’ve set the link to start at the appropriate part:
So when I look at companies like Google or Shopify I try to come up with a Fair Value. So, when I discount back, usually I like to use future earnings and future PE’s…I discount it back and - here’s back to your earlier question on inflation - if inflation keeps going higher, I have an 11.6% discount rate today, based on a risk-free rate of 2%. If the 2% goes to 3%, the value I’m coming up with goes down.
Which, in my view, is nonsense. If you’re coming up with “future earnings” and not using inflation on those, then why would you use inflation to discount them back to today? And if you are using inflation on the future earnings, then it should be close to a wash when you also use that same inflation rate to discount back to today.
I really believe these analysts get so wrapped up in their “models” and their “discount rates” and other math that they don’t even think about what’s really going on anymore. As Saul says, focus on how your companies are actually doing. If their business is growing rapidly then don’t let the noise bother you.
Inflation can hit some companies harder than other, but look at it from a fundamental business point of view. I can’t imagine that inflation affects a company’s need for internet security or database storage. I might say that higher inflation would mean less home refinancing and so Docusign might have less business, but that’s even a stretch to think that’s a major impact.