Greg,
I was sucked in here by jhg (who loves to stir the pot). My analysis has nothing to do with accounting. As a matter of fact, I am in total agreement with the points made in your link. Accounting is backwards-looking and totally divorced from the question of valuation.
How then does one determine value? Clearly, it is not from a balance sheet or an income statement, because those measures ignore the future and depend on conventions which often change. An economist would tell you that something is worth what a willing buyer and willing seller agree it is worth. So, by definition, QCOM is properly valued.
The key question is how does a knowledgeable individual determine value. Here's how I do it: I look at free cash flow estimates generated from a combination of historical results (i.e., how much incremental cash will a dollar of incremental sales generate) and industry pundits who are in the business of forecasting future demand. Finally, I need to estimate annual capital expenditures that are required to sustain future estimated growth. Subtract capital expenditures from operating cash flow and you get free cash flow.
Free cash flow which is a measure of how much cash the company could part with annually without constraining growth.
Next, I generate a risk adjusted discount rate to apply to those cash flows. I use the following: risk-free rate = 6.5%. I add risk premiums of anywhere from 3.5% (for ultra low risk stocks like utilities) to 30% (for ultra risky companies). For QCOM I use a risk-adjustment of 20% for three principal reasons: QCOM will face competitors who will try to circumvent its patent on CDMA; CDMA has yet to be recognized as a standard in Europe and China; QCOM's future depends entirely on the success of CDMA, which means that a technology developed in the future could obsolete CDMA.
So now I take a black-box approach. I calculate the PV of expected future cash flows and that determines the maximum price I would be willing to pay for the company.
I challenge anybody to use this approach and justify a price of $1,000 per share.
The "analyst" who set off the current buying binge made some pretty outrageous assumptions, not the least of which were:
-- 3 Billion hand sets sold in 2010 (about 50% of the earth's population)
-- a terminal value of 60x earnings (with 3 Billion hand sets sold in 2010 who is left to buy? Perhaps QCOM will be selling hand sets to Martians).
TTFN,
CTC |
