Well, it depends on your view of market pricing. If you believe that the market price is always efficient, always the "rational" price, then your argument about 66 to 44 holds. You would have to conclude that for some reason, Pixar's value has rationally dropped 33% since the summer when it hit 66.
I tend to view the market as efficient and rational on average, which means that day-to-day fluctuations around that average occur due to emotional issues.
Every way I do the numbers, with fair-to-conservative estimates about what we know about Pixar's next 5 years, I get a current valuation of about 40. That assumes that investors demand a 25% return for the risk of investing in Pixar, and that their theatrical releases average $150M at the box office.
However, these estimates are really rough. What if investors only demand a 10% return? (Believable, given that bonds are yielding 5%).
Then the fair value rockets to over 50.
What if Pixar over the next five years develops new business revenue, ie from TV Series, etc? That would up the value.
So, 40 is a pretty conservative number, in some ways. But in other ways, it isn't. As long as animation revenues and merchandizing remain the "holy grail" of movie studios, Pixar is going to face strong competition.
I think Wall Street is in general too unwilling to predict market success, that is why you see them always too conservative on Pixar. By the time Pixar has shipped enough movies to make Wall Street "believe" in their success, the stock will have long since doubled.
In the end, the earnings will drive this stock, and I think people are forgetting the residual nature of these revenues. People keep saying, "Take $200M, divide by 3 years..." That is not the way it works. Pixar will still be receiving revenue from ABL in 20 years, when the new XVD video system technology comes out and everyone buying their movies all over again, trashing their dated DVD collections...
Adam: One thing to keep in mind... while Pixar is up a lot, it's also down a lot. It
was 66 this year and now it's 44. I'm not so good at percentages and math, but
conceptually, the stock hit 66 long before BUGS was released. Now Pixar has
another sure success. It was pure guesswork before and now it's definite that there's
another success. That adds to their perfect track record so bodes well for the future
endeavors as well. Why should the stock be down from 66 to 44 on such excellent
confirmation of success?
Linda
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