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I've owned Macromedia since late '99 and rode it way up and way back down. I bought it because my wife and I do web development and liked their software. But I've turned over a new leaf and am trying to take a more objective/technical approach to my stocks. So below I've highlighted a Discounted Free Cash Flow valuation that I did for Macromedia. I'm basing this on Matt Richy's article in Fool on the Hill and the spread sheet that he sent me in relation to that article. This is my first stab at a DCF valuation so a few caveats to start with
a) the data I used is current up to the last 10Q so doesn't include any earnings announcements since 12/31/02
b) this is the first time I've done this so don't trust what you read here
b) comments/criticism would be greatly appreciated.

I started with a stock price of 14.95 and 62 million outstanding shares. Macromedia had 207 million in cash as of their last 10Q. I calculated their trailing twelve month free cash flow to be 20.2 million. That means the stock is trading at a P/FCF of 46 which is pretty high to begin with. Then plugging into the spreadsheet I used the following values:

share dilution: 5% annually
discount rate: 11%
stage 1 growth(next 5 years) - 25%
stage 2 growth(5 years after that) - 18%
stage 3 growth(10 years after that) - 10%
stable growth(all years after next 20) - 3%

I got an intrinsic value of $14.94/share (I actually played with the growth rates to make the DCF valuation equal the current share price). So if you believe that Macromedia is going to grow it's Free Cash Flow at the above rates, then it's current price is "fairly priced" (if the market cap grows at the same rate it will be a 20 billion dollar company in 20 years). You have to jack the growth rates up even higher to consider Macromedia a "bargain" at current levels.

So the question is, are the above growth rates realistic, too high, too low? Does anybody have any comments?


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