Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date! The 10Y and Software Valuations Much has been written about the 10Y, and interest rates more broadly, and their impact on software valuations. However, there’s a lot to unpack there. Interest rates aren’t simply 1 “thing.” They’re a basket of instruments with different maturities / durations set by different forces. They’re all related, but also independent, from one another. At the most base level interest rates are the ground truth of software valuations. As rates rise, valuations fall (mathematically). This is because ground truth for a company’s valuation is the present value of future cash flows. For software companies, a very high weighting of those cash flows come from outer years (as opposed to generating them now). So when rates rise, we discount a higher percentage of those future cash flows more given higher rates. Time value of money dictates that $1 in the future is worth less with higher rates as the discount rate rises.
Clouded Judgement 8.25.23 - The Ground Truth of the 10Y and Interest Rates
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