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Technology Stocks : Qualcomm Incorporated (QCOM)
QCOM 168.09+1.8%Nov 28 9:30 AM EST
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To: The Reaper who wrote (70489)4/13/2000 6:59:00 PM
From: A.L. Reagan  Read Replies (4) of 152472
 
Re: P/E ratios. Net present values are non-linear functions and as the rates of increase in cash flow generation increase, the inaccuracy of using a linear P/E formula increases.

Here is an example math exercise. Assume you have a company that earns $1 per share now, has a 50% annually compounded growth rate for the next five years, 25% for the following five years, and a terminal value at the end of year 10 of a good old-fashioned 15x trailing earnings. If your risk adjusted cost of capital was 15%, how much would you pay for this?

Answer: right around $122-$127 (depending on annual vs. quarterly compounding.)

A zero growth company should have a P/E greater than zero -
like the inverse of one's risk-adjusted capital rate for that company. (Maybe 10-12% if stable like a utility, which would be a P/E of 8.333 to 10% at zero growth).

Reason tells you that a high growth company may not continue such rates forever; but the Gorilla Game outlines the math basis for why gorillas like QCOM and CSCO can maintain the growth for a lot longer than say a one shot wonder dot.com.

There is potential for Q to grow EPS faster than 50% in the next few years, IMO. Such is the scalability of owning essential IPR in a tornado market, and the scalability in the ASIC business. (At least that's what the thought process is. On ASIC's, see AMD's CC on how just a 10% sales bonus rendered a doubling of their profits.)

Hope this helps - but these P/E "rules of thumb" are an incredibly inaccurate valuation technique.
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