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

To: Rocket Scientist who wrote (116192)	3/28/2002 9:50:32 PM
From: Jacob Snyder	Respond to of 152472

re: Using 8% instead of 13% for the discount rate increases the NPV from $31.5 to about $57 This is an example of an evaluation system, where small changes in any one of the several variables, causes large changes in the result, the "present value" of the stock. IMO, investors end up plugging in guesses for these variables, based mainly on their emotional gestalt of market conditions, and their general outlook.

To: Rocket Scientist who wrote (116192)	3/29/2002 9:40:00 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 152472

QCOM's employee stock options are granted with exercise prices equivalent to the stock's market price on the date of grant. So they're only dilutive to the extent the stock price goes up. the thing is, with this model we're trying to find a NPV "starting point" for a given discount rate and growth assumptions. under the assumption that this point is correct, the stock would be expected, ex ante, to appreciate in the future. (therefore issued options would be expected to result in dilution, ex ante, for the purpose of the model's assumptions.) also note that options from prior years have been exercised in the past several years even as the stock has fallen, leading to share base growth. obviously, if the stock fell steadily for an extended period of time, eventually that would eliminate the "overhang" of ITM options, but i don't think we're anywhere near that point due to QCOM's fantastic appreciation in 1999. options are a form of compensation as long as employees consider them so. if they lose interest in options (as they might in a protracted bear market), i would expect an offsetting rise in demand for cash compensation. to the extent that options and cash are equivalent, greater cash compensation will simply lower earnings to the extent that option compensation increases dilution; the net effect on EPS, over an extended period of time, would be expected to be the same. (however, that does not mean market perception of them would be the same since the reduction in EPS from greater cash outflows is more immediately "apparent" than reduction due to options-related dilution.) as for the options issuance, you point out a figure of 2% from last year, but it might be worthwhile to take a moving average of multiple years (like the last 5 years). after all, it would not be surprising if the company became a little stingier with options as the stock price boomed (and their perceived value rose), even as they may become less stingy now that the stock price has fallen. the 3% figure i chose is arbitrary and may be too high or too low, but i would need to see a number of years of actual data for comparison. your idea of equating dilution to 10% of EPS is very creative, but i'm not sure there is a realistic basis for it. as i mentioned, slow-growth MSFT's share base is growing even though it spends 6BB a year on option buybacks, which is a very considerable portion of its annual income. However, we started this dialogue comparing QCOM to Treasuries which have a well established risk and a predictable YTM. Clearly QCOM or any stock should be expected to provide a significant premium to a T-bond's perhaps i should have been a little clearer on this point, but in investing in an equity, i believe that the expected return should obviously be higher than a risk-free asset (in order for me to have a buying interest in the risk asset). in fact, it should be higher by a very substantial amount on the order of several hundred basis points, in order for me to consider it (the equity) worth the risk and uncertainty of investment in comparison to the risk-free asset. simply having a higher expected return than a 10yr T-bond (which i'm not convinced is the case for QCOM even as its price has fallen some 40% since i brought up this issue) is not enough for an investment to be attractive to me; it must exceed the bond yield by a certain risk premium (in this case the premium to the bond, although i would make the comparison against the 10-yr TIPS myself since it is indexed to inflation). re: SPX return I would be very pleasantly surprised if it is as high 11%. i agree. i scratch my head sometimes though, at what people take for granted. a person in their early 40s, with a portfolio in the low six figures, recently informed me rather matter-of-factly that they would have $33 million by the time they died at age 90-something. the basis for this assessment? their financial advisor had plugged in the "historical" 11% return and compounded their portfolio out 5 decades. a lot of people take the 11% as some birthright, but it's not. And discounting QCOMs future earnings stream by 11% + 200bp on the theory that it should "beat" the SPX by a significant margin is kind of artificial, imho, especially when you constrain Q's EPS growth to 6% for 20 out of 30 years well, while i agree with you that 11% is high for the SPX going forward, it is not unreasonable to assume for the model that QCOM can beat the SPX by 200bp, over a 30yr period in which growth equals that of the SPX for the last 20 yrs (as eventually cos earnings growth tends to fall in line with the SPX average), as long as the growth of the initial 10 years is high enough. consider MSFT again. it handily beat the SPX over the 1990s, but if you were to roll out the calculation another 20 years, the amount by which it "beats" the market would perhaps be much more modest. and it could be that all the "market-beating" takes place in the first decade (just as the market-beating earnings took place in the 90s). one can alter the model to handle different assumptions. i'm not sure i agree with your terminal multiplier idea. i will think about it a bit more, but it seems one could derive some logical absurdities from it (i.e., near-infinite present values for various assets). but i will get back to you on it later and would appreciate others' input on it. again, it is a creative idea. lastly, i would restate that our little model is highly dependent on the assumption that all these pro forma earnings are "good as cash" and deliverable to an ongoing and transparent increase in shareholder equity, or reduction of the share base, or dividend. and i am not totally convinced that this is true. all JMHO and i could be completely wrong.