As such, we do not see the type of overspending that occurred in the first tech boom.
Nonetheless, valuation of IT investments remains very difficult. Prices are volatile, as evidenced by the big drop in tech stock prices in January 2006 following Intel and Yahoo missing their forecast earnings by a total of only 4 cents. Technological changes in this sector are rapid, substantial, and often unanticipated. As a result, there is no history of past performance that analysts and investors can rely on to develop a clear understanding of the parameters of the business model and the revenue model of the tech companies they may be evaluating. There is considerable uncertainty about their future performance because technology development may not be successful, or the technology developed may not be received positively by customers.

Risk and Cost of Capital:
All this uncertainty in forecasting future cash flows implies that there is considerable risk when investing in an IT or a telecom project or in buying shares of a tech company. It is tempting to jump to the conclusion that the higher the risk, the higher is the cost of capital for tech companies, resulting in a lower valuation and a lower price-earnings multiple. Such a conclusion, however, would be false. Much of the risk in developing and marketing a technology is firm-specific and diversifiable. Consequently, contrary to casual intuition, a tech

company, in general, does not have to bear any higher cost of capital simply because of such firm-specific technology risk.For example, Google, Yahoo! and Microsoft, all now have a low beta (a measure of systematic or undiversifiable financial risk) ranging from 0.7 to 0.8. The beta is higher for Cisco and IBM not because they are tech companies but because their business models are heavily dependent on how well the economy is doing overall.
Does the irrelevance of such firm-specific technology risk mean that we can safely ignore the great uncertainty in predicting the future cash flows of a tech company or the incremental cash flows resulting from investment in an IT project? Far from it! An investor who has a superior understanding of the business model of a tech company or the intricacies surrounding an IT project is likely to earn above average returns on the investments based on such superior information. A thorough understanding of the technological aspects of the investment is no doubt an essential aspect and the first step in developing superior knowledge. But, that is not sufficient. The knowledge of technology must be complemented by a clear understanding of the strategic, competitive, financial, operational, and customer-related considerations of the business in order to develop more reliable estimates of future cash flows. Some of the key issues in superior evaluations of tech investments are discussed below.