In the context of DCF valuation, what common problem do high-tech firms face?

In the context of Discounted Cash Flow (DCF) valuation, high-tech firms often struggle with overestimating future growth rates. High-tech industries are characterized by rapid changes in technology and consumer preferences, which can lead companies to project excessively optimistic growth assumptions based on current trends or recent successes. This tendency can create unrealistic cash flow forecasts, as these firms might not adequately consider factors like market saturation, competition, and the possibility of technological advancements that could disrupt their business models.

On the other hand, while using too-high discount rates can be an issue in some valuations, high-tech firms typically face challenges more closely related to their growth assumptions than to the discount rate itself. Discount rates are usually derived from the firm's cost of capital or used to account for specific risks, and these rates are less likely to be a common problem compared to overly optimistic growth expectations. Thus, high-tech firms are more prone to envision future growth that may not materialize, rather than improperly calculating their cost of capital or discount rates.