Valuation in the Age of AI and Disruption
For decades of stock market history, valuation metrics — enterprise value to cash flow, price-to-earnings, free cash flow yield — offered a way to anchor prices to fundamentals, rewarding patience when the market overreacted.
That method still works, but only to a degree, if recent history is anything to go by. In industries being reshaped by artificial intelligence and other disruptive growth, cheapness no longer guarantees value, and expensiveness no longer implies excess.
Cash flow: rear-view and safety net
Enterprise value to cash flow still tells you how much capital a company generates relative to its worth. It matters when capital tightens — during rate hikes, credit crunches, or cyclical downturns. It is the difference between firms that can finance growth internally and those that rely on markets for survival.
Cheap versus weak
Low multiples can signal strength in stable industries. But in disrupted sectors — media, content, data services — they often signal erosion. “Cheap” businesses can stay cheap for years if demand is collapsing or pricing power is gone.
Expensive versus durable
High multiples can be justified if growth durability is strong. Chipmakers in the 2020s echo the network infrastructure firms of the 1990s: expensive on every metric, but central to the build-out of new technology. The dot-com bust showed that valuations without cash were unsustainable. The survivors — Amazon, for example — paired growth with eventual cash flow scale, validating years of high multiples.
Where valuation still anchors
In regulated sectors like utilities or infrastructure, earnings remain predictable. Here, traditional metrics continue to frame expectations. Valuation defines the range of plausible outcomes in a way it cannot for hypergrowth firms.
Historical pattern
This shift is not new. In the 1980s, hardware companies traded at multiples that seemed extraordinary until PC adoption caught up. In 2008, valuation suddenly mattered everywhere as liquidity evaporated. The lesson: cash flow is ignored in the boom, but indispensable in the bust.
Conditional, not obsolete
Valuation has not disappeared. It remains vital at extremes, in capital-tight markets, and in sectors with stable earnings. But in industries reshaped by technology, it has become a secondary filter. Near-term outcomes are driven more by growth persistence and margin expansion than by headline multiples.