Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Altaba Inc. (formerly Yahoo) -- Ignore unavailable to you. Want to Upgrade?

To: bearly_bullish who wrote (25200)	1/11/2000 7:58:00 PM
From: James A. Shankland	Read Replies (2) \| Respond to of 27307

I guess I'm having trouble following the math, can you explain what you mean? OK. YHOO just earned $0.19/share. Suppose their earnings grow by 13% per quarter for the next 5 years. That's an annual growth rate of about 63% (1.13 ^ 4 is about 1.63). Then, 20 quarters from now, YHOO will be earning $0.19 * (1.13 ^ 20), or $2.19/share. (My previous figure was a little lower, I think I had assumed an annual growth rate closer to 60% than 63%.) Now, what kind of P/E will YHOO command in January of 2005? This is really wild hand-waving, as it will depend on interest rates at that time (higher interest rates will tend to drive P/E's down); projected growth rates for YHOO; and, perhaps most important, investor sentiment. But just to put a stake in the ground somewhere, let's assume: * Interest rates remain low; * YHOO's growth prospects remain bright, but not at 60% per annum (once you're that big, it's really hard to grow profits 60% per year); * Investor sentiment is roughly neutral (neither wildly exuberant nor deeply pessimistic). Then YHOO might have a P/E of 45. At $2.19/share profit for the preceding quarter, profits will be at an annualized rate of $8.76/year. At a P/E of 45, the share price would be $394 ($8.76 * 45). In other words, if these figures are correct, then the next five years of spectacular growth are already fully priced into the stock, and the long-term prospects for further appreciation are bad. Of course, it's easy to poke holes in this analysis. YHOO might grow even faster than I've outlined; prospects for continued rapid growth might be better than I've assumed; interest rates might have dropped still further; etc. Still, looking at the above assumptions, I have a hard time calling them pessimistic. It seems more likely that something -- perhaps an external event -- goes wrong, making the above projections too rosy. For example, if YHOO grows profits at 63% per year for 4 out of the next 5 years, but profits only remain level one year (perhaps due to a recession), then YHOO will only have earned $1.34/share in the quarter just ended 5 years from now. At a P/E of 45, YHOO will be trading at $241. None of this, of course, means YHOO can't go up in the short run. Somebody was buying YHOO at $500/share a few days ago. Maybe that somebody based his purchase on calculations like mine above, but with more optimistic parameters. But I doubt it. More likely, these calculations weren't made at all. And if you're not going to bother making the above calculations, then you're as likely to buy YHOO at $700 per share as at $500. (And, I might add, you're likely to be greatly swayed by such factors as whether YHOO is splitting 2:1 or 4:1.) The trouble with that kind of sentiment-driven buying is that it can dry up pretty abruptly.