" I just assume that the market will value it on sufficiently the same terms tomorrow that it does today"
I don't believe this is a safe assumption. The "efficient market theory" has been proven consistently flawed time and time again. What the efficient market theory presumes is that all relevant and necessary information is already factored into a stocks price (very similar to the assumption you made in your post), therefore the market knows best (please forgive my rampant paraphrasing and broad interpretations). The problem with the effeicient market theory is the broad assumptions. Investors actions move the markets. Investors do not operate with perfect knowledge, which is why story stocks tend to do so well during boom cycles, people like to hear a good story. They often defer to uncorroborated subjective information, such as that surrounding many story stocks, rather than rely on historically proven, objective information. If that were always the case, it wouldn't be such a problem for we would have consistency. But as it is, since investors do not act with perfect knowledge, the oppurtunity exists where the acquisition of more perfect knowledge becomes apparent. Often upon the acquisition of this "more perfect" knowledge (although all parameters regarding the stock and the company have remained the same), investors actions tend to differ tremendously. Cycles such as this I like to call Boom/Bust cycles. As the euphoria builds around a story stock (or story sector, ex. biotech or internet) the market booms due to the actions of participants with less than perfect knowledge (ex., many of the biotechs in the early '90, and the internet search engines of not too long ago, I am afraid that I may have to put NSCP in this category as well - it is during this time that you see many IPO's due to the fact that you can use your overvalued stock as a kind of counterfeit currency). Once the acquisition of more perfect knowledge takes place (such as the realization of a more accurate valuation), an explosive decompression takes place, which I call the bust. This happened with NSCP, biotechs, it happened with REIT's, the conglomerates of the '60, and on Black Monday in 1987. A buying oppurtunity usually exists after a bust, for just as the assets were overbought during the boom, the explosive decompression of the bust often leads to them being oversold. If one were able to time the market (much riskier) additional profits can be made buy playing both the long and short sides.
As for valuation of tech stocks - as in any other stock, Cash is King. Using cash flow usually leads to a consistently reliable valuation measure. Of course this may be tempered with subjective valuations, but historically,if you ignored subjectivity and relied on consistently increasing, healthy cash flows, you would have been much better off.
I have used a discounted cash flow valuation model in an attempt to value Microsoft and Netscape. Even after giving Netscape the EXTREME (read unprobable yet possible)benefit of the doubt in net income and revenue predictions, the market still tacked on up to a 100+% premium on the companies share price. The shares of NSCP are presently trading at the high end of the moderately optimistic end of my valuation, although the companies prospects and situation have changed relatively little (definitely not by 100%). This goes to show you how the market can wildly, inconsistently and often irrationally value a stock.
If a "SMART" financial or strategic buyer (an entity that purchases controlling shares in companies for short term investment (ex. an LBO to break up the company), or for long term synergistic growth) were to acquire NSCP, a realistic price range would be somewhere between the low 30' and the mid teens.
Please excuse me for drifting off of the MSFT topic, but I thought I would offer my opinion as to valuation.
PS
These same principles apply to MSFT as well.
My study is posted on my website at rcmfinancial.com |
