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 : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (96905)	2/10/1999 2:25:00 PM
From: Frank E W	Respond to of 176387

The key words here is Mr Miller owns Dogway! 104 may be fair now BUT wait till the 16th we will see whats fair priced!

To: Chuzzlewit who wrote (96905)	2/10/1999 3:00:00 PM
From: JRI	Read Replies (1) \| Respond to of 176387

Chuzz- If Mr. Miller is typical (of those waiting on the sidelines "should I buy Dell, should I not...because it is trending around fair valuation")...I would submit the following... * Almost all analysts are valuing Dell assuming a 5-year annual growth rate of around 30% (high side 35%)...as you have frequently metioned, all the factors are in place so that Dell can grow (EPS, at least) at 50% over the next 5 years...if this 50% proves to be correct, then most cash-flow-based valuation models (like Mr. Miller's) are, in all probability, valuing Dell way TOO LOW... BTW- I'm becoming more and more firm in my belief that Dell is going to have a blow-out 1999...and that EPS (y-o-y) can grow at rates above 60% (and even, some quarters 70%, y-o-y)...This would blow away all current estimates for the performance of the company during this period.... * Dell is poised to have its greatest upside surprise in several quarters, announced on Tuesday....At .34 per share (which may indeed be too low), Dell would beat all whispers, and be .03 above consensus...If .34 or better is acheived, this will force analysts to significantly upgrade 1999 earnings estimates for Dell..giving heft to the stock...

To: Chuzzlewit who wrote (96905)	2/11/1999 12:31:00 AM
From: Chuzzlewit	Respond to of 176387

Thread, I have been asked by a member of this thread to expand on my remarks as to why discounted cash flow analysis depends so closely on assumptions. I will break my response up into three sections. This section will deal with general concepts. The second section will deal with a simple growth model applying those concepts, and the third and final section will be a brief discussion of the results of the second section. DISCOUNTED CASH FLOW (DCF) is a technique used by many financial analysts to try to calculate a value for a capital asset like a stock. It is assumed that the stock's value is attributable entirely to the cash that the company can spin off to investors without compromising its operations. For simplicity's sake, let's call this free cash flow (FCF). And lets say that FCF consists of the cash generated by a business minus the cost of investments that allow the business to continue on the required growth trajectory (whatever that is). A business ought to be generating a series of cash flows over time. It is the anticipation of these cash flows that makes us invest (as opposed to trade or speculate). But now comes the tricky part: how much are those future cash flows worth. In finance the concept is called Present Value. Conceptually, we can take a cash flow and move to any point in time and tell you how much it will be worth. It all depends on how we discount cash. For example, if we have an inflation rate of 2% we know that it will take $102 one year from now to buy the same basket of goods that costs us $100 today. We also know that two years from now that basket of goods will cost 100(1+i)(1+i)=$104.04. In fact, we could calculate the cost of that basket at any time in the future by multiplying its present value* by (1+i)^n where n is the number of periods. Similarly, we could take a future cash flow and determine its present value by dividing it by the same factor (1+i)^n. So it is easy to calculate the present value of a stream of free cash flows in the future by simply dividing each cash flow by the appropriate factor and then adding all of the discounted number up. So one problem is what discount rate do we use. Generally, the discount rate consists of two components: a risk-free rate plus a risk premium. The risk-free rate is usually the 30 year treasury rate. The risk premium may be inferred from market data (and is a fairly involved statistical procedure). Unfortunately, the estimation of the risk premium is prone to significant error. But so too is the estimation of future cash flows prone to error. The table in part two show a hypothetical company that experience rapid growth for five years and then grow at a more modest 15% per annum for an additional 34 years. For the period of hypergrowth I have chosen 50%, 45%, 40% and 35%. The risk adjusted discount rates ranged from a low of 16% to a high of 20%. The numbers in the matrix can be thought of as multiples of next year's free cash flow. Or, if you prefer (although it isn't accurate for reasons discussed above) you could think of them as forward P/Es. -- End of Section 1

To: Chuzzlewit who wrote (96905)	2/11/1999 12:42:00 AM
From: Chuzzlewit	Read Replies (1) \| Respond to of 176387

Section 2 Present Value of a stream of cash flows Hypergrowth Rate 50% 45% 40% 35% Discount Rate 16% 124.36 105.55 89.13 74.86 17% 100.93 85.76 72.51 61.00 18% 88.17 70.75 59.91 50.48 19% 69.51 59.22 50.22 42.39 20% 58.88 50.23 42.67 36.08 Table assumes that from year 1 through year 6 cash flow grows at the hypergrowth rate, and from year 6 through year 50 cash flow increases by 15% per year. End of Section 2

To: Chuzzlewit who wrote (96905)	2/11/1999 12:56:00 AM
From: Chuzzlewit	Respond to of 176387

Section3 The take home lesson from the data in table 2 should be clear. A shift of an analysts growth rate of just 5% (from 50% to 45%) results in a 15% drop in PV. Similarly, an increase in the estimate for the appropriate risk adjusted discount rate results in a 19% drop in value. Put the two together and we end up with a 31% drop! This kind of testing is called sensitivity analysis, and when you do DCF it is essential that you perform such a test. So back to my initial criticism of the analyst who pronounced to us that Dell was worth $104. What discount rate did he use, and what were his cash flow assumptions? He doesn't tell us. Take home lesson: beware of analysts who set price targets without telling you the basis of their analyses. The devil is in the details. Perhaps now it will be clear to you why I think that valuation is such a difficult issue. What analyst in his right mind would predict cash flows three years out (much less thirty years from now) for a product that has a build time of a few days and becomes obsolete every three to five years? TTFN, CTC