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Hey Miguel,
Yes, I agree (and have stated previously) that there are some assumptions of my argument that are oversimplifications. I only wanted to illustrate the point that comparing growth and P/E ratios is complex. If NTAP and EMC were growing at the same rate, then your argument would be correct (assuming that the rates are constant). But you specifically stated that NTAP is growing faster than EMC, which complicates the analysis. Really, what one should do is estimate the function that best predicts the growth of a company, and then use a differential equation that utilizes the changes in P/E ratios to value a company (or at least I think this does a better job). In actuallity, the 5 year time period doesn't matter -- I just wanted to point out that if P/E ratios are constant, then the stock price will grow as fast as the earnings growth rate, which in NTAP's case is higher than EMC's case. And as a side point, an even better model uses certain types of diffusion equations to model stock prices, and predict
valuation and estimated rate of return. Heck, buy 'em both and you'll most likely do fine and reduce your risk! They're both great companies. Cheers. P.S. if you're mathematically-inclined I can post some of the equations that many theoreticians are using to value companies and predict stock price returns. |
