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.
first of all, i am not really in the business of defending Buffett. although i must say i find it intriguing that people seem much more interested in criticizing the value of Berkshire or Coke than examining the value of QCOM.
the point about Buffett's low purchase price is that, from the time of his purchase, he has an ex ante high expected return based on fundamental returns. such is to say, share price appreciation was not the necessary delivery mechanism for a high expected return (contrast that with today's QCOM buyers). the fact that he did not trade out of the stock based on the high speculative return KO also delivered may say more about Buffett's interest in fundamental returns than speculative returns. i do not really care to digress further than that.
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.
i believe this is untrue. for example, MSFT went public at a value of what, a billion or so. and now it has cash reserves of some 36 billion, growing at a rate of a billion a month--i.e., it is recouping its original IPO market cap in free cash flow on a monthly basis. granted, the pie is divided into much finer slices these days. but an early investor in msft could have done well on a fundamental basis.
the other thing you might consider is that the future is not necessarily going to be like the past. just because many people flushed their savings down the toilet in the world's greatest speculative bubble ever over the past few years, doesn't mean they will again any time soon. that is another reason why imho it is worth considering the fundamental-return aspect of equities, instead of just the speculative-return aspect.
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.
in other words, it seems to me you think investors are hoping for speculative returns. that doesn't bother me--it is one way to skin a cat, but it assumes investor perceptions in the future will be the same as in the past. to take a simple example, people take pro forma earnings as "real" today, even though they basically did not exist 10 yrs ago. the NDX "made" some $20 BILLION last year pro forma, but they lost $80 BILLION by GAAP. that is a $100 BILLION credibility gap in my book. it may be that in the future, investors decide that an $80 BILLION loss is not a gain of $20 BILLION. so even though people may not think about it, using pro forma figures as the basis for a future PE is a bit dicey in my book, since it is impossible to know if future investors will be as tolerant as they are today.
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
that doesn't really address the point i brought up. my point is, once the "essential" CDMA patents expire, it seems to me that the remaining IPR in QCOM's license portfolio is not as attractive. so it seems to me that some makers could decide to dump QCOM licenses if they do not need the "non-essential" patents.
companies often strive for (but rarely attain) something economists call monopoly rents. that's basically what QCOM is looking for (and supposedly going to get) on its CDMA IPR portfolio. i would submit that QCOM founders were very fortunate, smart, and dedicated early on by getting a stranglehold on the essential CDMA IPR; HOWEVER, IMHO, going forward, it will not be nearly so easy for them to "replenish" this strangelhold, because now everybody and his mother are on the CDMA bandwagon (i.e., they are all going after the same monopoly rents, which means that it is a low likelihood that anybody will get them, beyond a cost-of-capital return on R&D dollars). such is to say, when the essential IPR expires, it seems to me that QCOM will be left with an IPR portfolio just like any other. one interesting exercise would be to identify the expiration dates of the key patents, and consider possible royalty adjustments after that date. in my calculations, i have made no such adjustments (i.e., i assume for the sake of argument that QCOM maintains its current monopoly rents in perpetuity, although i doubt that will happen in reality).
all just my humble opinion. |
