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Technology Stocks : Information Architects (IARC): E-Commerce & EIP
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To: Rick Voteau who wrote (1485)8/1/1997 1:57:00 PM
From: Richard Ogier   of 10786
 
I don't think it is valid to assume a PE of 40 for a stock that will have greatly reduced earnings starting in 2000. I haven't seen anyone attempt to take this into consideration, so I will make an attempt at this. There is a formula for giving a value to a company based on all its future earnings, discounted by some percent each year. But I will do something simpler. First, let's assume that a PE of 30 is valid after the year 2000. Then the following formula makes sense:

value = (EPS for next 2.5 years) * 2.5 + (EPS beyond 2000) * 27.5

Assuming EPS is 2.50 for the next 2.5 years, and will be reduced to 0.50 in the year 2000, this gives

value = 2.5 * 2.5 + 0.5 * 27.5 = 20

Richard
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