Lucretius, I think you are giving in to an attack of hyperbole! Who believes that earnings and valuation don't matter? Future earnings prospects are paramount in determining the market valuation of any stock. But here we have a problem.
There are people out there who are trying to extrapolate Compaq's problems to Dell. But Compaq's problems are self-inflicted to a large extent. Ultimately, this argument distills down to the scare of a price war. As they say, the proof of the pudding is in the eating, and we shall have a taste or two when we compare Compaq's and Dell's quarterly results. If you recall, that was done last quarter also, but you bears are constantly pushing the argument further out. In any event, Dell and Meredith report business as expected, so we have no evidence of this consequence.
Then there are those like Jim Patterson who claim that the corporate market is likely to be lured into purchasing older generation machines. It doesn't make sense to me, but then, no evidence has been presented to support this claim.
Finally, we have those who claim that rapidly falling component prices will hurt Dell's profits because sales won't increase fast enough to compensate for lost gross profit even if profit margins remain constant. Well, most industry forecasts are around 15% to 17% annual growth, with Dell expected to grow 3 to 4 times the industry average. That means that at 3.5x16 we end up with around 54% increase in units sold. That implies that ASPs would need to drop by about 35% from last year. But as we've seen, ASP's have not dropped anywhere near those projections, and in fact, as Dell aims more at the corporate server and notebook markets, I wouldn't be surprised to see ASPs within a $100 of where they were last quarter.
So you see, Lucretius, that people on this thread are quite aware of these arguments, and for the most part have dismissed them as specious, because while they are plausible, they lack evidence.
Now we come to a really tough issue: valuation. I've been trying to come up with a decent valuation model for growth stocks for years. Now, JBN3 knows my mantra on this issue very well, but you do not. Here it is:
If you consider this stock to be overvalued would you please share with us your valuation model. To be plausible, it must take into account projected future cash flows (and the rationale behind those projections), the risk attached to those projections (standard deviation), and the risk-adjusted discount factor to apply. Presumably, this will include long-term interest rate forecasts.
So as we say in poker, I call.
TTFN
CTC |
