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Politics : Formerly About Applied Materials
AMAT 327.03+2.5%3:59 PM EST
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To: kdavy who wrote (45852)4/24/2001 1:12:36 PM
From: Bill Shepherd  Read Replies (1) of 70976
 
kdavy: Re:Is there such a thing as the intrinsic price of a stock.

Basic economic theory (at least back when I took economics, which was a loooong time ago) says that the ONLY true measure of the value of a stock is to use the present value of future earnings streams.

There are two key variables to factor into such a calculation...(1) the interest rate one assigns to discount future earnings, and (2) the expected growth (or decline) in future earnings. As you might imagine, forecasting either one of these variables is a complex and imprecise science -- just look at how securities analysts flub up. Trying to predict earnings growth rates for a company such as AMAT is indeed difficult.

I offer the "dot.com" industry as proof that this valuation method ultimately rules...they never had any earnings, did they? Moreover, rabid optimists were willing to assign (or allow, in the case of market "momentum" types) hugely overstated growth rates to these firms. I submit that we're also seeing these forces at work in CISCO valuations...was it really plausible that CISCO would grow at a 50% rate for the forseeable future? No, dot.coms could not sustain their lofty prices.

Regards,

Bill
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