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Technology Stocks : PSFT - Fiscal 1998 - Discussion for the next year -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (278)	3/23/1998 7:04:00 AM
From: Mr Logic	Respond to of 4509

Paul it is very hard to value, I agree. Not least because the parameters are all unknown into the future. Given the uncertainty it is easier to be lazy and consider a couple of scenarios and make an objective judgement. P/E and PEG are extremely brutal valuation techniques which are widely used. I don't want to recreate a spreadsheet here, but in the simplest case you can put in certain growth scenarios (% growth or absolute, absolute figures are better IMO) for the medium term, then apply steady growth (IBM is the best example, a healthy IT company, doing well - use a P/E of, say, 15-20) beyond a certain point. Choose your rate of return, expected return, see what all the free cash flows discount back to and compare that to the market cap. There are many things you don't account for but you aren't trying to predict to the nearest 1%. You could be even simpler. e.g. PSFT earns $150m, then $200m, then 'IBM mode'. Forget discount rates, the 'value' becomes 150+200+200x16 or $3.55bn, say $15/shr. Broadly you would say that the $10-$20 range is way out of line with current price. You could easily run a similar scenario to get a gut feel of what the numbers would have to be to justify $50, $100 or $5/shr. You could also apply the same thinking to take account of acquisitions, new business areas etc. This is much harder to apply to a very small company in a relatively massive potential market (e.g. MSFT previously, or Internet type companies now). With Y2K companies it is easy to apply (for Y2K specific business). I hope this makes sense - a rough approach to apply a reasonableness check to stock price, based on your view of the future. P.