Re: The Dismal Scientist on Qualcomm, Cisco, et al
He is right in his approach, and it does not contradict the Gorilla Game at all. The FM provides graphs instead of formulas, but it is explicitly stated in the book that a company, including a Gorilla, is worth the current value of all future free cash flows. It is appropriate to question his use of earnings as a proxy for free cash flow, and you might wish to use a different set of assumptions, but the basic approach is sound. And IMO should be followed.
Speaking of using earnings as a proxy for free cash flow, I hope this will be taken as a contribution and not as a criticism. Unlike JDSU, which reports negative earnings but has positive free cash flow, CREE has had negative free cash flow every year that they've been public, despite showing positive earnings. Semiconductor companies as a group do not have great free cash flow, and I know that CREE is expanding, but I would suggest that those interested in CREE watch this.
- Pirah
(who really is a valuation nut) |
