I'm not the GP, but the rebuttal to your point about interest rates is that it is not about using cash vs debt. GP was making the point that interest rates affect NPV calculations ie future cash flows of the company have to be discounted at a higher rate
Discounting NPV of future cashflows affects stock price, and increased interest rates mean a greater discount. No argument there.
Okay.
So what?
Why would a dropping stock price motivate layoffs?
The GP's claim is that it's because it makes debt more expensive (which it does!)
> when borrowing money becomes more expensive, these companies can no longer fuel business expansion or stock buybacks with cheap debt
But unless you're funding your operations with debt, that just doesn't matter that much, and in fact it can have a positive effect because it makes stock buybacks cheaper (looking at you, Apple).
Now, you could make the argument that maybe shareholders see a dropping stock price and push for layoffs to protect their investment.
Okay.
Except a lot of these companies have dual-class shares. Meta can (and does) simply ignore their shareholders. If they're laying people off, it's because Zuck decided they should.
The best explanation I see is bad long-term projections of the fallout of COVID, combined with social contagion as tech would rather sell the idea that there's a major recession imminent and they're cutting proactively, rather than admit they just screwed up and over-hired.
what's weird to me is that this is happening at all kinds of companies, including ones with what I thought was pretty level-headed management. It's not just one company oops screwed up and over-hired, and "tech" is not really a monolith. Yet, they somehow all simultaneously screwed up and over-hired?
Wouldn't NPV of future cash flows dropping mean you may have less cash flow in the future to pay for employees you may have hired anticipating those cash flows?
By the way, you're certainly right that increased interest rates depress the NPV of capital expenditures as the cost of capital increases.
That means businesses planning to, say, open a new factory or expand into a new market, might choose to delay or cancel those plans, and that can certainly impact growth projections.
But the tech megacorps aren't typically growing that way anymore. And even in the case of a company like Meta, which is investing heavily in their "metaverse" vision, they're funding that with cash because they're money printing machines.
So the way interest rates factor into cashflow analysis is in the opportunity cost to the investor of investing in a particular asset. That is, if interest rates rise, that means I can probably find greater yields elsewhere, which for a stock means I should increase my discount rate.
> First, assume that our opinion of future free cash flow doesn’t change so as to isolate the effect that the discount rate will have on value. You can think of the discount rate as the opportunity cost of investing in Stock A over Stock B or Investment C. If interest rates rise, so too should our discount rate since we would have more opportunities to do more with our money elsewhere. And since discount rates and present values are inversely related, value will decline, all else equal, as the result of a rise in interest rates.
> The first way in which interest rates factor into a DCF model is through the discount rate. The discount rate captures the rate at which the value of money declines. Prevailing interest rates are a big factor in opportunity cost. And opportunity cost is an ingredient of the discount rate.
> Calculating the DCF involves three basic steps. One, forecast the expected cash flows from the investment. Two, select a discount rate, typically based on the cost of financing the investment or the opportunity cost presented by alternative investments. Three, discount the forecasted cash flows back to the present day, using a financial calculator, a spreadsheet, or a manual calculation.
So DCF analysis doesn't actually say anything about company's actual future cashflows. It's about the value of those cashflows to the investor when weighing the value of that stock versus other types of investments.
Bringing us back to the topic at hand, that means higher interest rates should depress stock prices because of the increased opportunity cost versus investing in other assets.
Excellent summary. It's always about opportunity cost and relative prices, because people always have options. Employees can go where they are paid more, investors can invest where the returns are higher, consumers can choose the better value. The world is filled with businesses that had positive operating margins but nevertheless declared bankruptcy because their funding costs were too high.
