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Technology Stocks : Wind River going up, up, up!
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To: Allen Benn who wrote (1068)5/22/1997 6:41:00 PM
From: Mark Brophy   of 10309
 
You need to check your math.

I calculated the value of Wind River based on your assumptions:

Now, let's put it all together and try to value WIND. To be conservative, assume that
EPS will grow only for five years at 40% per annum. Assume growth then slows to
25% per annum for another five years; then to 12% for another five years; and finally
to 6% indefinitely. Assume we start with next year's estimate of 57 cents EPS and
around $3 existing cash/share....

To preserve options concerning the discount rate to use, I will consider
three rates: 8%, 10% and 15%.

I used your middle discount rate of 10%, rather than 8% or 15% and the stock
price today is 32.

Wind River 10% Bond
Year Int. Earnings Growth Int. Earnings Growth
Value Rate Value Rate
1997 3.00 0.57 40% 32.00 3.20 10%
1998 3.57 0.80 40% 35.20 3.52 10%
1999 4.37 1.12 40% 38.72 3.87 10%
2000 5.49 1.56 40% 42.59 4.26 10%
2001 7.05 2.19 40% 46.85 4.69 10%
2002 9.24 2.74 25% 51.54 5.15 10%
2003 11.98 3.42 25% 56.69 5.67 10%
2004 15.40 4.28 25% 62.36 6.24 10%
2005 19.67 5.35 25% 68.59 6.86 10%
2006 25.02 6.68 25% 75.45 7.55 10%
2007 31.70 7.48 12% 83.00 8.30 10%
2008 39.19 8.38 12% 91.30 9.13 10%
2009 47.57 9.39 12% 100.43 10.04 10%
2010 56.96 10.51 12% 110.47 11.05 10%
2011 67.47 11.78 12% 121.52 12.15 10%
2012 79.25 12.48 6% 133.67 13.37 10%
2013 91.73 13.23 6% 147.04 14.70 10%
2014 104.97 14.03 6% 161.74 16.17 10%
2015 118.99 14.87 6% 177.92 17.79 10%
2016 133.86 15.76 6% 195.71 19.57 10%

As you can see, the 10% bond is a much better deal than Wind River.
Using your assumptions, the value of Wind River is 17 3/4, and
your assumptions must be valid from now until 2011.

Wind River 10% Bond
Year Int. Earnings Growth Int. Earnings Growth
Value Rate Value Rate
1997 3.00 0.57 40% 17.75 1.78 10%
1998 3.57 0.80 40% 19.53 1.95 10%
1999 4.37 1.12 40% 21.48 2.15 10%
2000 5.49 1.56 40% 23.63 2.36 10%
2001 7.05 2.19 40% 25.99 2.60 10%
2002 9.24 2.74 25% 28.59 2.86 10%

2003 11.98 3.42 25% 31.45 3.14 10%
2004 15.40 4.28 25% 34.59 3.46 10%
2005 19.67 5.35 25% 38.05 3.80 10%
2006 25.02 6.68 25% 41.85 4.19 10%
2007 31.70 7.48 12% 46.04 4.60 10%
2008 39.19 8.38 12% 50.64 5.06 10%
2009 47.57 9.39 12% 55.71 5.57 10%
2010 56.96 10.51 12% 61.28 6.13 10%
2011 67.47 11.78 12% 67.41 6.74 10%
2012 79.25 12.48 6% 74.15 7.41 10%
2013 91.73 13.23 6% 81.56 8.16 10%
2014 104.97 14.03 6% 89.72 8.97 10%
2015 118.99 14.87 6% 98.69 9.87 10%
2016 133.86 15.76 6% 108.56 10.86 10%

Your assumptions are remarkably similar to the founders of the
company that sold shares in the secondary offering last August
for $18/share. However, they seem to have better command of the
intricacies of spreadsheet calculations than you.
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