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Technology Stocks : Citrix Systems (CTXS) -- Ignore unavailable to you. Want to Upgrade?

To: MikeM54321 who wrote (7760)	4/1/2000 9:58:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 9068

Mike, If we knew that growth would occur at a rate certain, then any stock should be priced like a risk-free security. It would compete with 10 year government paper and appreciate at only around 6%. Now let's take this hypothetical a couple of steps further. Let's assume that cash flow from operations will be $.84 this year, and grow by 40% per annum for 9 years, so that 10 years from now CFFO will be $17.36. Let us further assume that beginning 10 years hence all CFFO will be distributed to shareholders. Finally, assume that the company ceases to grow after 10 years we have a future value of the stock of $17.36/.06 = $289 per share, and a present value of $161.52. Repeat this calculation assuming a 25% growth. Now you get a FV of $104.31 and a PV of $58.25. Finally, repeat this calculation assuming 10% growth. Now FV is $33.01 and PV is $18.43. Now assume the following likelihoods: 40% growth is 25% likely, 25% growth is 50% likely and 10% growth is 25% likely. So the expected growth of a basket of such stocks is .2540 + .525 + .2510 = 25%. But should the basket be priced at $58.25 (the same as the 25% growth scenario)? -- no because this basket is no risky, so the price shoud be something less than $58.25 depending on our tolerance for risk. **** You are correct that "hope" drives company valuations, but when hope is not tempered with an appreciation of risk we end up with a bubble. TTFN, CTC