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 : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: SKIP PAUL who wrote (111860)	1/29/2002 8:35:33 PM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 152472

You are asking for a much higher risk premium than the market is giving it is not a risk premium; it is the assumed "expected return". the expected return can be set arbitrarily in my calculation. i just assume that "QCOM enthusiasts" would want a market-beating return, which i imagine 13% will be, going forward. to say that this is higher than what the market is offering is the same as saying that the expected forward long-term return is lower than 13% (with which assessment i agree). at $43, and assuming a wildly bullish 10-yr CAGR of 25%, i calculate the expected return at 9%. assuming a less wildly bullish 15% CAGR for the next ten years (which would still probably put QCOM in the top 1% of all S&P500 cos based on earnings CAGR for the next decade), i calculate the expected return at around 4%. assuming a more realistic 12% CAGR for the next decade, which is still fantastic, i calculate the expected return at around 2.4%. assuming a still excellent, but more modest 10% CAGR....produces an accordingly lower expected return in my calculations. i should note that my calculations all assume QCOM makes $1 in the starting year (2002), and take the pro forma figures at face value (i.e., as "retained earnings" or "free cash flow"). of course, my calculations could be wrong, but in principle, i don't see what is wrong with the idea of examining the relationship between forward earnings growth and expected return, vis-a-vis the current share price.

To: SKIP PAUL who wrote (111860)	1/29/2002 8:49:13 PM
From: Wyätt Gwyön	Respond to of 152472

just to clarify (hopefully)... i wrote: it is not a risk premium; it is the assumed "expected return". this is a little idiosyncratic on my part, so i will explain a bit more. risk premium relates to a company's cost of capital. growth companies have a lower cost of capital than value companies (e.g., MSFT, if it so desired, could issue debt at a lower yield than could Ford). historically, growth companies have underperformed value companies in the SPX because the higher cost of capital for value results in a higher long-term return. (simply put, if MSFT issued debt at 6% and Ford at 9%, Ford debtholders would expect a higher return, although they would be presumably taking a greater risk of default; apply this bond analog to equities and it seems obvious to me why value has outperformed over time). QCOM, as a growth co, presumably has a lower cost of capital than the market, so it is not surprising if the expected return is low. my point in harping on expected return is that people think low cost of capital means they will get a high return, whereas what it has meant, in general, is that they will get a low return (but with less "risk" than value stocks, according to Fama/French). unless the market changes severely (or QCOM falls on hard times) i think it is unlikely that QCOM will actually trade down to the point where its cost of capital would raise its expected forward return to a 13% level. which is to say, i don't see how i could expect to make 13% off this stock (other than trading it). that is why, when i say something like "personal buy-in target price" of $15, it is not that i necessarily think QCOM will actually trade down to that level. rather, that is the kind of buy-in price point at which i would feel confident in a long-term return that beats the market. conversely, if i only expect a 3% or 5% return at current levels, i feel i can achieve such a return through less risky instruments. all JMHO, as always