Mike,
First, today is a wonderful day to be a Citrix shareholder, but I must wonder if there is any particular news driving the stock other than its addition to the S&P 500.
Second, the question of valuation in connection with SEBL is indeed worrisome to me. I like the company and its business, BUT -- price does matter. If we were prescient and were able to look out at the company say 10 years from now what would its earnings need to be to justify today's prices? Assume that in 10 years the company becomes mature, and at that point commands an earnings yield of 7% (P/E of around 14). Assume further that investors will demand a risk premium of roughly 15%-20% (insert your own number here) on top of the current risk-free rate of 6%. So we end up with a risk-adjusted discount rate of somewhere between 21% and 26% over 10 years. With a current price of roughly $120 that implies a share price of between $807 and $1,210, with earnings of roughly $56.50 to $84.72. Is this is possible? I tend to doubt it. I believe that current valuations either signal much more grandiose expectations or, more likely, a bubble created by momentum investors.
I am very wary of pat ad hoc formulae developed over the past few years to explain away inflated share prices. Companies like COMS, IOM, NETA and PSFT (among a raft of others) should give one pause. At some point reality will return. I think we are beginning to see this with AMZN (which I predict will be the next Boston Chicken).
So far as I can tell, SEBL is an excellent company with wonderful prospects, but I think it is a poor investment because of its price.
TTFN,
CTC |
