adios
06-21-2004, 04:59 PM
I haven't looked at the financial statements in detail and I realize that RIMM has hot product with their Blackberry device. Also I'm aware that the demand for this type of wireless technology will grow a lot for a long time. My brother-in-law is an IT manager for Snohomish County just north of King County in Washington state. The county is using them a lot for many applications just to give an example. Tremendous productivy improvements have resulted according to him. Anyway RIMM is trading at a 200 PE or thereabouts. I used a two stage dividend discount model and plugged in some numbers to see what kind of parameters would indicate a 200 PE. Here's what I came up with:
High Growth Rate Period:
15 years
Earnings Growth Rate of these 15 years:
50% (that's on compounded basis)
Return on Equity for the High Growth Period:
60%
Growth Rate for the stable period (ad infinitum after high growth period):
10%
Return on Equity for the Stable Growth Period:
20%
Yahoo has a RIMM beta of 2.663.
These absurd numbers seem to point to a gross overvaluation. Any kind of what I would consider reasonable numbers doesn't even come close to a 200 PE being indicated.
I plugged in what I would consider very rosy numbers that have a more realistic chance of being true and came up with a PE of 35 using a beta of 1.0 for the stable growth period:
High Growth Rate Period:
15 years (A lot of years of high growth, very optimistic)
Earnings Growth Rate of these 15 years:
15% (I still a sustained growth rate in earnings on a compounded basis of 15% is very high over a 15 year perid.)
Return on Equity for the High Growth Period:
25% (a very optimistic number)
Growth Rate for the stable period (ad infinitum after high growth period):
8%
Return on Equity for the Stable Growth Period:
12.5%
High Growth Rate Period:
15 years
Earnings Growth Rate of these 15 years:
50% (that's on compounded basis)
Return on Equity for the High Growth Period:
60%
Growth Rate for the stable period (ad infinitum after high growth period):
10%
Return on Equity for the Stable Growth Period:
20%
Yahoo has a RIMM beta of 2.663.
These absurd numbers seem to point to a gross overvaluation. Any kind of what I would consider reasonable numbers doesn't even come close to a 200 PE being indicated.
I plugged in what I would consider very rosy numbers that have a more realistic chance of being true and came up with a PE of 35 using a beta of 1.0 for the stable growth period:
High Growth Rate Period:
15 years (A lot of years of high growth, very optimistic)
Earnings Growth Rate of these 15 years:
15% (I still a sustained growth rate in earnings on a compounded basis of 15% is very high over a 15 year perid.)
Return on Equity for the High Growth Period:
25% (a very optimistic number)
Growth Rate for the stable period (ad infinitum after high growth period):
8%
Return on Equity for the Stable Growth Period:
12.5%