EXCERCISE, showing how Discount Rates impact Valuation, using $NFLX as an example.
Why?
“Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices"
--- Warren Buffett
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The Futures curve is pricing in 8 Interest rate increases, or +210bp that the ANALYTS at Investment Banks have NOT yet adjusted for in Models
Investment Banks typically use the 10yr Bond, + Equity risk Premium + Beta Adjustment to arrive at a Discount Rate😉
Cont ..
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Scenario 1 - Use todays scenario Consensus (Factset) with a 7% Discount Rate, gets +10% upside in Share price for $NFLX to $416 (36.3x P/E)
Yet ...
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Scenario 2 - Same Consensus forecast but add 210bp to the Discount Rate. Surprise Surprise😉 Now there is -31% to todays Share price, with a price of $263 (22.9x P/E)
What do you choose 🧐❓
This is why there is always a focus on the 10 Yr Bond, as Equities are priced to Bonds & the cashflow they can generate
Now you can see how sensitive valuations can be to changes in Interest Rates. The Bond Market is pricing in rises, YET Analysts at Investments Banks have not
