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Comment by bretpiatt | Hacker News Reader

Interest rates have a large indirect impact on their business, not in the day to day operations but in the value of the future cash flows vs. risk free rate.

Super simplifying, if risk free interest rate is 0% then you can value current cash flow the same as future ones. When you have 5% risk free in 14 years that new dollar is worth half of what it is today.

This has big impact on enterprise value for growing businesses.

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> Interest rates have a large indirect impact on their business

Can you expand on how please?

Wouldn't this depend on Google (or other companies) actively financing things through debt with loans from banks?

Why would they need to do this if they have tons of cash on hand?

> Alphabet cash on hand for the quarter ending September 30, 2022 was $116.259B

If anything, can't they put that money somewhere and earn interest on it? Higher interest rates means they'll earn more on it.

How do they experience increased costs from interest rates if they aren't financing projects through debt? Or are they?

They are related but different concepts. The value of a company is equal to the discounted value of its future cash flows. If rates go up, that means a higher return can be had for zero risk, which means all cash coming in the future at more than zero risk is now worth less. There is a second term other than risk free rate in the discounting equation which is related to capital structure. So, amount and cost of debt does impact valuation (though there is some debate and theory that makes my statement not quite true), but it is not the only factor.

Are you saying in a perfect world, the perfect CEO would "can" (get rid of) every team/project that isn't projected to 5% ROI yearly (assuming risk free rate has roughly gone from 0.25% -> 5%)?

Obviously there are exceptions where you want to eat losses up from (R&D a big project for a few years hoping it returns a lot down the road)?

WACC = (E/D x Ke) + ((D/E x Kd) x (1 – T))

E = equity value

D = debt value

Ke = cost of equity

Kd = cost of debt

T = tax rate

Ke = Rf + B * ERP

Rf = risk free rate

B = beta of company

ERP = equity risk premium

Kd = Rf + credit spread

In theory, if a project's ROIC is less than WACC, it does not generate economic value.

How does this apply given that we're assuming Google has enough cash on hand from profit of other aspects of their business that they do not finance most projects through new loans (debt) from banks at current interest rates because they don't need to?

Their cash balance doesn't really matter, it impacts their cost of capital in various ways, but you can still compare the ROIC of any given project to the overall company's cost of capital.

Their cash balance can also make higher risk-free returns otherwise

and charlie munger said he never used calculus

That’s all algebra :)

If you can make a 5% return on investment and borrow money at 0% interest than you're going to invest a lot.

As the interest rate approaches 5% your willingness to invest falls.

Tech runs wild on low interest rates because the return potential is so high. It falters on high interest rates because the risk is high.

> As the interest rate approaches 5% your willingness to invest falls.

Do we have proof based on their financial statements quarterly that they are actively investing their cash in risk free assets yielding 5% instead of investing in projects? I find it hard to believe that a team of $200k-$300k/yr earning employees at Google can't find a way to generate more than 5% net margin for the company?

The particulars don't matter. That was just an example.

If a company sees an opportunity that it thinks it can profit on above its costs it will do so, if it has the resources.

> I find it hard to believe that a team of $200k-$300k/yr earning employees at Google can't find a way to generate more than 5% net margin for the company?

But does the decrease of 6% of those employees have a resulting income decrease? Likely most teams will continue to function without the missing employees. Also plenty of the employees are recruiting and HR and other non-income-generating employees.

Also yes they have billions in marketable securities, in debt, and interest income, etc

https://abc.xyz/investor/static/pdf/20220427_alphabet_10Q.pd...

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