I believe that the analysts are giving full Professor Christensen "discontinuous innovation" value to NTAP. A company that grows at 75% is overvalued if it trades at 200x earnings. The risk reward is imply not in balance. Although I like the great growth stocks, I believe they are not great buys at any price. Any earnings disappointment puts the investor at great risk, much more at risk than than the average stock. Having said that, I'm holding what I have in NTAP!
I just want to jump in with two comments.
First, I want suggest that saying a stock is overvalued because it trades at a higher multiple to earnings than its growth rate (the old PEG metric) is not a useful metric in determining the proper valuation of a high-growth company. The PEG metric (along with the corresponding assumption that a PEG of 1.0 is "fair value") incorrectly projects the relationship between earnings growth and fair valuation as linear. I contend that this relationship is decidedly nonlinear. i.e., a company A growing at twice the rate of company B is worth more than twice company B's worth. I would love to write a more complete explanation of this idea at a later time, but for now I'll just rely on its intuitive appeal.
Second, I agree that one faces more potential downside than the average stock should NTAP disappoint on earnings. However, this risk is offset by the notion that NTAP is less likely to face that eventuality of disappointing in the foreseeable future. i.e., if it happens, it will be really bad, but the likelihood of it happening is very low, whereas an old economy (or even old tech) company will hurt its stock less on a disappointment but will be more likely to commit such a shortfall.
Andrew Danielson |
