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Subject: Re: The future of QCOM stock in calendar 2000
Date: 1/16/00 8:06 AM
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Author: BruceBrown
Number: of 7089
Recommendations: 34
George wrote:
What I was saying is that I would like see my portfolio grow by 100% from this point; aggressive, but less
so than the IRR mentioned above. I was simply wondering to what extent QCOM can contribute to this
goal in 2000, and beyond.
You mentioned IRR which is "internal rate of return". This is the same as "average annual rate of return" and
takes into account money earned on the investment (interest, dividends, cap gains distributions), as well as
changes in share price and broker's fees. Since it is an annual rate, it acts like a compounding annual interest rate.
So, if you invest $10,000 in Qualcomm and get an average annual return of 20% over two years, then you'd
have $14,400, or 44% on the original investment) following two years of investment. Year three using the 20%
figure would give you $17,328 or 73.28% on the original investment. $20,793.60 or a little over 100% on the
original invesment and the compounding effect continues on and on.
Intuit's Online site explains IRR as this:
Internal rate of return (IRR)
The growth rate of your money over a time period relative to the amount invested. IRR, which compares
the profit to the amount invested, is expressed as a percent gain or loss for easy comparison with other
percent changes for the same time period. The IRR calculation is based on continuous compounding.
Here at the Fool, we can use this view in our portfolios and IRR is called:
Annualized Percent Return
Annualized Percent Return (“Ann % Ret”): The annualized return from the “Total Cost” to the “Current Value”,
also called Internal Rate of Return (or IRR). Shows as “N/A” in Consolidated view and for stocks you've held
less than 15 days.
and can be used for each invidual security in the portfolios such as Rule Maker and Rule Breaker as LT% Value
Change. However, this LT% Value Change is the percentage gain on the original investment and is not broken
down into annualized returns. My mistake was taking the LT% Value Change and for simplicity's sake, dividing
the LT% Value Change by the number of years of holding the security to get a real 'back of the envelope' annual
percentage. Sorry about that.
Then there is the "average annual total return" which is, according to Quicken, a more accurate way of evaluating
investment performance than unrealized gain or loss.
Average annual return
A calculation that converts a cumulative total return into an annualized figure. For example, an
investment that has a cumulative return of 30% over three years--meaning it has gained 30% for the
entire three-year period--has an annualized gain of 9.1%. That is, the security's average annual return for
each of those three years was 9.1%. (Total return is the sum of any appreciation or depreciation in the
value of a security, plus the value of any dividends produced by the security.)
We often talk here on the Fool message boards about an investment 'bag' which is 100% return on the original
investment. When a stock goes from $20 to $40, we have our first 'bagger or bag' which = 100% of the original
amount invested. Lot's of chat about two 'baggers', four 'baggers', 10 'baggers', etc... . Using this 'bag' approach,
it is easy to see that as your original investment grows and adds 'bags' to your original investment, the market cap
of the underlying security does not have to double each time you get a new 'bag' or 100% on the original invested
capital.
As these young gorillas and older gorillas continue to grow, you cannot forget about the amount of share buy
backs that they institute to create shareholder value. Not that this is going to have a dramatic effect on the market
capitalization, but it needs to be factored in when discussing market cap growth.
Let's take a look at some technological leaders and their market caps:
Gorillas
MSFT = $ 579,212.80 (mil)
CSCO = $ 367,995.19 (mil)
INTC = $ 344,331.81 (mil)
ORCL = $ 152,065.96 (mil)
QCOM = $ 92,665.15 (mil)
SAP = $ 78,423.37 (mil)
SEBL = $ 15,503.08 (mil)
ITWO = $ 14,884.60 (mil)
PSFT = $ 6,386.22 (mil)
Hunted Gorillas that might be possible gorillas in the future
GMST = $ 15,416.88 (mil)
CTXS = $ 12,147.89 (mil)
CREE = $ 2,544.37 (mil)
RMBS = $ 2,132.71 (mil)
Kings
EMC = $ 111,162.42 (mil)
JDSU = $ 66,773.24 (mil)
Godzillas
AOL = $ 141,394.48 (mil)
YHOO = $ 92,923.72 (mil)
AMZN = $ 21,895.56 (mil)
EBAY = $ 17,275.46 (mil)
B2B Plays
ICGE = $ 33,805.67 (mil)
ARBA = $ 15,934.20 (mil)
CMRC = $ 11,994.82 (mil)
A few other well known companies
GE = $ 494,925.60 (mil)
WMT = $ 287,266.42 (mil)
IBM = $ 215,636.50 (mil)
MRK = $ 173,270.67 (mil)
DELL = $ 112,867.04 (mil)
AMGN = $ 69,782.31 (mil)
GM = $ 62,298.61 (mil)
CPQ = $ 51,636.50 (mil)
The beauty of all our worry about market cap is to think of what these above companies (at least the ones that
were around) had years ago. We can't think in terms of Qualcomm's market cap five years out without
considering that the rest of these companies are most likely going to increase their own market caps, provided
growth continues in their respective business and the market awards the share price for that continued growth.
I should have been clearer in my earlier post when talking about return on original investment in Qualcomm and
addressing the issue of 100% annualized rates of return in relationship to IRR, 'bags' or average annual total
return. Let's use the example of someone who bought their first shares of Qualcomm on Friday at $140 each. If
Qualcomm goes from a base of $140 a share to reward that investor with some baggers (each bag is 100% of
the original investment) from here to a share price of $840 over the next five years, what happens to Qualcomm's
market cap? It goes from $ 92,665.15 (mil) to $ 555,990.90 (mil) provided the same number of outstanding
shares are used.
I should have been more careful not to confuse IRR, 'bags', average annual total return and LT% Value Change.
Using the original investment as my base, every 100% rate of return (bag) means the stock does not always
double as well as the market cap. Only the first 100% (bag) is a double in share price and market cap. After
that, the compounding of our return rate accelerates much faster than the market cap or share price does. If one
isolates each individual year and bases the return on share price alone for that year to obtain a 100% return from
January 1 to December 31 using the 'average annual total return', then yes - the market cap must double each
year to achieve that. I was thinking more in terms of long term percentage rate of return or value change and the
compounding effects of one's original investment. I should have made that clearer. I know that the market loves
to think in terms of one year time frames and mutual funds live and die by this fenced in time frame.
I like to use the LT% value change on my original investment to see what my return has been and not the yearly
stock price appreciation as a seperate entity. If Qualcomm, using our above scenario in the future, began a year
at $700 a share and ended the year at $840 one would have a 20% return for that year, but based on the original
investment of $140 a share - the year it went from $700 to $840 would be another 'bag or 100%' of the original
purchase price to add to the cummualtive LT% Value Change.
If the above scenario were to take place using my 'bag = 100% return on original investment", the market cap of
Qualcomm five years from now would be less than Microsoft's market cap is today. I would also assume the
obvious that Microsoft's market cap five years from now would be a lot larger than it is today provided it
continues to grow at it's current rate and the market continues to award it a similar valuation multiple. I'm not
saying this is or isn't going to happen.
We don't have to have market cap doubling every year to get a 100% annualized LT% Value Change using the
'bag' or IRR compounding basing the return on the original investment and annualizing it. Here's a chart (which
uses LT% Value Change on original investment) that you need to allow the computers to generate a couple of
minutes before it appears on your screen:
siliconinvestor.com
I couldn't get it to go beyond 300 months to get to the true beginning of Wal-Mart, but it shows the return on
GE, Wal-Mart, Cisco, Microsoft, Intel and Qualcomm since the early to mid 70's (for those companies that
were around back then). Keep in mind, that $1650 dollars invested in Wal-Mart (100 shares at $16.50 each) in
1970 is worth over $18 Million today. You would of had to pony up more like $10K in Intel to get that kind of
return. Yet, Wal-Mart's market cap is much less than Intel.
I apologize for not being clearer. I do not expect Qualcomm's market cap to double every single year, but I do
expect my original investment to continue to compound via the IRR and give me many more 'bags' - or 100%
return on my original investment with time. This is not to be confused with the annual share price appreciation and
market cap appreciation percentage. As the cost basis is so low for many who have invested in Qualcomm, each
'bag' on that original investment will not move the market cap of Qualcomm to a double each time, yet will move
our (IRR) rate of return on original investment in a compounded fashion to create wealth.
BB |
