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Technology Stocks : Network Appliance

NTAP 107.25

-3.9%

10:05 AM EST

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To: Miguel Octavio who wrote (700)	3/1/1999 8:11:00 PM
From: michael modeme	Read Replies (1) of 10934

I don't understand the reasoning that a company's growth rate should always be equal to the price/earnings ratio. Let's suppose that NTAP is growing at 50% a year, and EMC is growing at 35%. Let us further suppose that NTAP's P/E is 100, and EMC's is 50 (to make it simple). Here's how the stock prices would fair over the next 5 years: NTAP's stock price would be equal to $319 after 5 years assuming it is still selling at a P/E of 100 -- a total gain of 659%. EMC would sell at $448 assuming it is always selling at P/E = 50 -- a gain of 347%. An investment in NTAP would be around twice as good as an investment in EMC. Conclusions: 1) valuations must be made based on changes in P/E ratios, 2) stocks with higher sustained earnings growth ultimately make better investments since P/E ratios are fairly constant based on growth rates and the fact that larger market caps demand higher P/E ratios for a given growth rate, and the fact that companies' growth rates are usually inversely related to market cap (slightly). Cheers.

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