Keith Rabois says tech valuations must fall as long as the Fed raises rates, just like in 1999 when six rate hikes triggered the dot-com crash. Higher discount rates cut the present value of future profits, hitting tech companies hardest. He predicted the market top on November 18 and expects recovery to take at least three years.
Keith, what do you think is driving tech right now? I think in May you said it was giving you June 2000 vibes, and that was sort of before an even bigger drop. How are you feeling right now?
Well, we're still going through 2000. This is not surprising. This is exactly what happened in 2000. The Federal Reserve raised interest rates six times from 1999 to 2000, and tech stocks collapsed in terms of valuation. This is completely predictable, as you know, on November 18th, I accurately predicted this was the top of the market. And we're just going through the process of weaning out the people who didn't believe. The disbelievers are just going to have to go away. We haven't quite hit June 2000 when all the disbelievers in 2000 went away, but that's going to happen any day. We are in a new world order. And as long as the Federal Reserve is raising interest rates, tech valuations have to go down. This is inevitable law of physics. basic, you know, finance 101. I just actually am astounded that 99% of people don't seem to understand.
When you allude to June 2000, Keith, just to be clear to our audience, that was sort of a bear market run right before an even steeper drop. When are you going to know that sort of we are there and there might be some opportunity or rather we're at a bottom and there's opportunity to get back in?
Well, if you studied March, so what happened when the Internet bubble, in quotes, collapsed? It collapsed in two phases. First in March of 2000, late March 2000, and then permanently really collapsed in June. And that's when sort of all held back loose and people realized the world had changed permanently. But it took three years at a minimum to escape from that change. And I don't think it's going to be a very fast recovery. As long as inflation is going up, interest rates are going up as well in the United States, unless we go on an austerity kick, which would not necessarily be a bad idea. Cutting government spending might be a better idea. But that doesn't seem a lot, doesn't seem to be a lot of political will to do that. So interest rates are the only variable. And if interest rates go up, tech valuations are going to go down. Tech valuations must go down because the discounted cash flows must be divided by a different number. And as the number you divide by goes up, the valuation inevitably goes down. Most tech companies do not mint money in the short term. They intentionally try to mint money 5, 10, 15, 20 years in the future. And when you divide by a different discount rate, those companies are just gonna be worth 10, 20, maybe 25% of what they used to be worth.
Yeah, Keith, I think so many people forget the dot-com bust wasn't a moment. And it's like, oh boy, it was down and now it's up from here. It was a whole mood. It was like a period where people soured on tech and its prospects. There were questions and whether the internet was overhyped. But I really wanna talk to you about, E-commerce, how do you see this inflation that we're experiencing right now affecting the small businesses that you're trying to roll up and operate better with Open Store, particularly when it comes to wallet sizes and customer acquisition?
Well, you know, if you look at the actual data, the consumer behavior hasn't really shifted yet. You see some weakness in some e-commerce companies like Wayfair and a little bit of Etsy, but Fundamentally, this is a macro correction. If you look at shops market cap, which is roughly 25% of what it was a year ago, it's not because Shopify is missing its numbers per se. It's because you're dividing by a different interest rate and creating a totally different discounted cash flow analysis. So we haven't yet seen what happens if consumers really stop spending. So what you might see then is, and this did happen in 2000, you had the interest rate corrections first. Then you had companies missing their metrics, missing their earnings. The combination of those is pretty catastrophic. Then you're talking about a 10% market cap compared to what you were at, you know, a year ago. And that may happen because there's some evidence on the horizon that consumers may be a little bit nervous, but there's no clear, unequivocal evidence that consumers are pulling back their spend yet.
