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Technology Stocks : Dell Technologies Inc.
DELL 127.90-4.4%Dec 17 3:59 PM EST
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To: Paul Merriwether who wrote (21419)11/13/1997 3:02:00 PM
From: Chuzzlewit  Read Replies (2) of 176387
 
Paul, the point behind the analysis is to put stock pricing in some rational framework. How do we figure the the discount rate? Start with a risk-free rate and add a risk premium to it. The risk-free rate is about 6.25%. IBM is selling for about 10x earnings, so it's risk premium is roughly 3.75% and IBM has negligable top-line growth so you can eliminate a growth premium from consideration as part of it's P/E. If you're dealing with a growth stock, the risk premium is obviously higher, and I would suggest using beta times the zero-growth risk premium. In the case of DELL that would be 3.75 x 2.2, or 8.25. Therefore, I calculated a risk-adjusted discount rate of 14.5% (6.25 + 8.25), and rounded it up to 15% as a reasonable estimate.

I think it is as reasonable for people who claim that DELL is "overvalued" to back up their conclusions with some analysisas those who are bullish, clearly stating their assumptions as I have. So to recap, here are the assumptions: 1) DELL eps grows to about $7.91 per share in 2001 [source: industry analysts]; 2) DELL becomes mature in 2001 and experiences only 10% growth per annum [source: simplifying assumption deemed to be conservative in view of IDC outlook for the computer market]; 3) the market will discount DELL's eps at about 15% [source: risk-free rate plus risk premium derived from analysis of IBM with no top-line growth and DELL beta]

Paul
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