Reginald, it should be apparent to you that the reason for making the simplifying assumption of maturity is not to cap valuation, but to cap the cash flows required to achieve that valuation. I have no idea what the valuation of AOL ought to be. I might have a handle on that if I could see a trajectory from its current position to having sufficient cash flow to support its current market cap. That is in no way an attempt to intellectually constrain its growth, but rather, to at least generate a milepost along the way.
IMO, there is only one decent way to value an investment, and that is on the basis of discounted cash flow. For illustration, let's assume we have a black box that can generate cash at the rate of $1 per year at the end of each year in perpetuity. If we agree that the appropriate discount rate is 10%, then we would agree that the value of the box is $10. But suppose we could forgo this year's $1 dividend, and achieve a perpetuity of $1.50 beginning at the end of next year. Well, we would agree that a year from now the box would be worth $15, and thus $13.63 now (15/1.10). Suppose that the procedure could be replicated 10 times. Thus, ten years from now the box would throw off annual cash flows of $57.67, and it would be worth $576.65. But in today's dollars it would be worth $222.32 [1.5^10/(1.10^10)]. It would carry a forward-looking P/E of 222.32, which puts it right up there with companies like AOL.
All that I am trying to do is go through a similar exercise with AOL. Let's figure out what people see as the cash flow that will support today's valuation in the future, and then let's see whether those cash flow projections make any sense in the context of AOL's business model.
TTFN,
CTC |
