How we value Technology stocks
Model: DCF + P/E Blend
Technology companies combine high growth potential with the risk of overvaluation. This model blends DCF (60% weight, capturing long-duration growth) with a P/E sanity check (40% weight, capping speculative excess). The DCF uses the slowest growth decay (0.05) recognizing that tech companies can sustain competitive advantages longer. The P/E component applies a dynamic ceiling: max P/E = min(growth% x 1.5, 30), preventing runaway valuations.
Why this model
Tech firms combine high growth potential with current profitability that peers can benchmark. Pure DCF could overvalue if growth assumptions are too aggressive. The P/E blend acts as a market-calibrated anchor, while the PEG-based cap prevents paying excessive multiples.
How it is calculated
DCF: 10-year FCF projection with aggressive growth cap (20%) and slow decay (0.05) toward 3% terminal. P/E: 5-year median P/E capped at dynamic ceiling (growth x 1.5, max 30). Blend: 60% DCF + 40% P/E.
Best suited to
Technology and IT companies where high growth potential must be balanced against the risk of speculative overvaluation.