Re: An optimistic scenario is $20B and $5.50 EPS in 2005. With low interest rates, lets give it a 35 multiple. That gets us a price of $192.50 in 2005
I wholeheartedly agree, that is an optimistic scenario.
20B in sales is about twice the sales in the just-passed peak. For all tech companies, sales (and other) numbers were inflated by the Bubble. What happened in the Bubble was massive overcapacity was put in, throughout the entire economy, but concentrated in high tech. AMAT was perfectly positioned to take advantage of that wild spree of overbuilding. It was nice, but now it's over. So I doubt we get doubled sales in the next peak, unless you are postulating another Bubble. You think, by 2005, investors will be once again throwing 100s of billions at unproven telco/internet/other Concepts again, as they were in 1999?
Same thing applies to that $5.50 EPS guess. My guess is $3.50 in the next cycle peak, which is still substantially above the numbers reached in the Bubble. The pessimistic guess is the next peak EPS just matches the previous peak.
Same thing, even more so, applies to your hope of a peak PE of 35. There is no historical data, no pattern in the past, that would lead you to expect this (once you've thrown out 1999-2000 BubbleNumbers and other outliers on the thin edge of the Bell-Shaped Curve). This is a highly cyclical industry, and recent events, if anything, indicate it's getting more cyclical, and even harder to predict the future earnings stream. Which argues for lower, not higher, valuations. The LT EPS growth rate is 25%, and the increasing cyclicality/volatility of AMAT's earnings means the PE should be less, not more, than that expected growth rate. You only get a peak PE of 35 if the Bubble comes back.
Your three forecasts (EPS, sales, and PE at the next peak) are not independant variables. Each depends on the others; they stand or fall together. That is, if your guess for sales doesn't happen, then it's impossible you'll get that EPS either, or especially that exuberant PE. So, if you are wrong on those numbers, you are going to be very wrong on the calculated peak stock price.
Also, you've made the most optimistic possible assumption about future interest rates and inflation, out of a number of possible futures. That is, you're assuming the present interest rates, the lowest any of us, even Lester, have seen in our lifetimes, are going to continue till 2005.
Here's numbers I consider more realistic:
$3.50 EPS X peak PE of 20 = stock at 70 at next cycle peak.
And, since you need a margin of safety, an investor shouldn't be buying at a price over half that hoped-for years-from-now peak valuation. Which is why I started buying at 35. If my guesses are anywhere near correct, it's hard to think we've seen anything that could be called a trough, yet. If we have seen the trough at 27, I take that as evidence the Bubble hasn't fully deflated. And this next "upcycle" could be flattish, with so much volatility that channel-traders do better than longer-term holding.
I'll make a prediction: if you hold, waiting for $192/share for AMAT, you'll be holding into the next downturn (2006?). I'll be out long before then. |
