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 : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: GVTucker who wrote (36814)	6/1/2000 11:19:00 AM
From: RetiredNow	Read Replies (1) \| Respond to of 77400

Yes if you use interest rates as your discount rate in your calculations. However, that is too simplistic an approach. My premise is that increasing rates will NOT cause telecom companies to decrease their spending on infrastructure buildout over the next 5-10 years. If it did, then those who slowed down spending would be left behind in one of the biggest tectonic shifts in the economy since the industrial revolution. So if my premise is correct, you have to use the rate of earnings growth or better yet, the rate of operating cashflow growth and a discounted cashflows value for the company. Use these as your tools, it is clear that interest rates DO NOT matter to companies like Nortel and Cisco, in the next 5-10 years. But discount rates (rates of growth) do matter as you said. Hope that clarifies my meaning.

To: GVTucker who wrote (36814)	6/4/2000 8:01:00 PM
From: Adam Nash	Read Replies (1) \| Respond to of 77400

Rates do matter to long term holders, particularly for a stock like Cisco. When you pay 100x earnings for a company, you are counting on earnings far out to justify holding the stock today. The higher rates go, the less those far out earnings are worth today. $1 of earnings 10 years out is worth 48½ if you use 7.5% as a discount factor. It is worth 38½ if you use 10%. Looking even further to the future, high rates render earnings 20 years hence close to zero today. Rates do matter. If you don't care about rates personally, it will be to your detriment. All true, but remember that the Fed is manipulating short term rates. When discounting earnings, you use the rate relevant to the cash flow being evaluated. So if you are looking at 20-year flows, you'd use a twenty-year rate. Short term rates are not really relevant for the calculation. Inflation, in fact, is more important, since long term rates will correlate with long term inflation. For this reason, when the Fed ratchets up short term rates it can actually improve the long term prospects for earnings if it is believed that they will control inflation better over the long term.