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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Michael Bakunin who wrote (92857)	11/19/1999 1:05:00 PM
From: Robert Douglas	Respond to of 186894

Michael, Thanks for the kind words, but my thought experiment is back-of-the-enevlope at best. Plug into a spreadsheet the last four-quarter numbers for earnings ($7B), revenues ($29B), GDP ($9276B), then set up a two-stage growth period with whatever limits you like. To discount, I assumed a dividend payout continuing at 5% of earnings during the high-growth period, and payout of 50% thereafter. My GDP plug was accurate; I think I was misunderstood. However, I can tell you that under those rather optimistic assumptions (20% growth 'til INTC revenues = 5% of GDP), that the discount rate implied in today's price is 11.7%. -mb I have several problems with this type of model. First in looking at dividends in the future and discounting them back to the present you ignore that portion of income that is reinvested. This reinvestment will produce further income in the future. The model fails to capture this. Inherent also in this type of calculation is a bias toward nearby payments as each year that passes diminishes the value of that payment. So your assumption that large payments (50% payout ratios in your example) come late - what 16 years or so? - diminishes their value so greatly that it makes them practically valueless. Lastly, use the smell test here. You are saying that a hypothetical company, since Intel will in no way do your assumptions, that will become one-twentieth of the GDP - albeit present GDP - is worth only one-hundredth of the market cap of all stocks trading today (I am using a $20 trillion number here that may be off a bit). Something just doesn't mesh between your model and reality. What you may be saying, of course, is that all stocks are ridiculously overpriced. If this is your contention then that is fine, I just think you would be better of stating such. This type of model is so horribly biased as to make its usefulness nil. -Rob

To: Michael Bakunin who wrote (92857)	11/19/1999 2:07:00 PM
From: Robert Douglas	Read Replies (1) \| Respond to of 186894

Michael, Just out of curiosity, I tried to duplicate your model. The value of the dividends in the first period ($350 million today and growing 20% a year for 16 years) discounted at 11.7% is practically irrelevant - about $10 billion. You said that Intel was only worth $200 billion, so that leaves the $190 billion present value of the remainder. The future value of $190 billion at 11.7% for 16 years is $1,116 billion. Your assumptions were that earnings grow 20% making earnings in year 16 of $129 billion or the company selling at roughly 9 times earnings. Way too cheap in my opinion.