Mucho:
...one must consider that he [Buffet] bought his 200MM shares of Coke at a very low price..
Now wait a minute. Your [and Buffet's based on your several cites] approach to calculating the appropriate price to pay for a stock investment does not factor in any share price appreciation, it's assumed to be zero. You simply ask:
"How much earnings does this company have to throw off annually over the next 5, 10 or more years to justify my paying its current stock price and still get an "acceptable" return given the risk involved?"
or
"Given the projected after tax earnings of this company over the next 5, 10 or more years, what is the NPV I should be willing to pay for this stock so that I get an "acceptable" return on my investment given the risk involved?"
If you go back over the last 5 or 10 years and look at the after tax earnings of MSFT, DELL, CSCO or most any other high growth tech stocks (few of which have ever paid out any earnings as dividends to shareholders), and look at their retained after tax earnings, you will find that none of them have ever had sufficient earnings to meet your criterion for investment returns, so on that basis you would never have bought their stock at any time over the past ten years.
However, factor in their stock price appreciation, and the 5 year or 10 year CAGR you arrive at is consistently 25% to 50% or more, which made them attractive investments indeed, much more so than dividend paying "value" companies such as KO over a comparable time period.
I would bet that most LTB&H types here who have held or are holding QCOM are counting on significant stock price appreciation over the next five years as CDMA gains worldwide market share, WCDMA starts rolling out in GSM networks, and other wireless data uses using CDMA are developed. What we're counting on is that as QCOM's revenues and earnings grow, so will the perceived value of the company, and hence the stock price, and at a rate that will result in gains that far exceed your criterion for an "acceptable" CAGR.
Now you and other market sceptics may well be correct in believing that P/E's will contract by 50% or more over the next few years until even "high growth" companies are trading at P/E's of 20-25, in which case clearly QCOM will no longer be commanding its present 40-50 P/E and giving us a share price of $200 - $250 for $5 of earnings. Instead, we'll be looking at more like $100-$125, which still works for me, though maybe not for others.
Yours (and Buffet's) "value" and supposedly "lower risk" approach is fine if you have accumulated a big enough pot of $$ such that the low returns provided by the KO's of the world, or by bond funds, treasuries, fixed rate annuities, etc. provide an adequate annual income. For those of us who are still trying to build a big enough pot of $$ to reach that point, a more aggressive strategy is required which involves finding those companies that appear to have some significantly better than average (and more certain) growth prospects in addressable markets, revenues and earnings - criteria which (IMO) QCOM meets as well as or better than other companies.
As for the longevity of QCOM's IPR royalty and chipset revenue streams from 3G CDMA, the fact that a significant chunk of the world's wireless subs are still analog after over a decade of 2G digital networks, and that the various projections floating around predict that the number of 3G phones in use will still only be around 35 - 40% of the total 5 years from now, I'd count on this being a safe bet for the next 5-10 years, even if QCOM quits investing in R&D for future whizmos and decides to rest on its present achievements. There's just too much time, effort and $$ being invested in 3G worldwide for decent returns to be earned by the carriers in any time frame less than 5 - 10 years.
David T. |
