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Technology Stocks : Vitesse Semiconductor
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To: The Ox who wrote (2654)7/1/1999 8:58:00 PM
From: Chuzzlewit  Read Replies (2) of 4710
 
Michael, from a theoretical point of view the price for any stock should be the present value of its free cash flows. Obviously, we need to have an estimate of what those cash flows will be for an infinite period of time -- clearly an impossibility.

Several valuation shortcuts have been developed -- many of them totally off the wall. For example, price to sales (PSR) is a commonly used metric in e-commerce, but makes no theoretical sense because it is divorced from cash flow.

YPEG ratios are a little better because they tend to value earnings and growth, but fail because they ignore prevailing long-term interest rates.

But other heuristics do make a modicum of sense. For example, if a company is rapidly growing and expected to reach maturity in five years you may ask what should the value of the company be five years hence (based on cash flow projections). Then, you might take that value and discount it back to the present using a risk-adjusted discount rate.

Getting back to your original question, it seems to me that the analyst is setting a one year price target of $80 based on the earnings forecast for the following year. While I am not thrilled with the approach (because it fails to take into account long-term free cash flow growth prospects, and because it depends on distant earnings estimates), it does make some sense.

TTFN,
CTC
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