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Technology Stocks : Wind River going up, up, up!
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To: Pirah Naman who wrote (1270)6/11/1997 10:40:00 AM
From: Mark Brophy   of 10309
 
I see what you mean!

If you carry the NPV out to all future years, just about any stock looks underpriced! So, Allen's use of the NPV far into the future such as the year 2011 is invalid. It would make sense, though, if Wind River sustains a high growth rate for as long as Microsoft. In addition, if the Indians who sold Manhatten Island for $24 had put their money in an account earning 6%, they'd have 17 trillion dollars 350 years later!

Alternatively one could estimate what the "market" will pay for a stock at some point in the future. This can serve as a check (even though it is NOT consistent with the application of the projected stream of earnings method!) but caution is advised. It is downright silly to assume that the market will pay a premium in the future for any stock, no matter how great it might seem now. Investors are prone to long periods of irrational valuations (up and down) even on well capitalized stocks.

This is the method I prefer, despite the obvious problems. After a while, Wall Street likes to price a stock such that the trailing P/E is equal to the future growth rate. I don't agree with that valuation method, but it's still commonly used. Wind River will probably have trailing earnings of $0.80 in 18 months and a P/E of 40, so the stock price is likely to be 32. In the meantime, the P/E is likely to drop to 40 every 6 months or so when we have general declines in tech stock prices. I think there will be more opportunities to buy at 20, but even that's risky if the growth rate declines to 30%.
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