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Jim writes, between power plays:

The dirty little secret with DCF's is that you can obtain any value you wish to, simply by altering the inputs.

Exactly. If you want to have some fun, go to www.valuepro.net and check out whatever stock floats your boat or bails out your goalie. You can change the growth rate and recalculate the intrinsic value. You can't alter the discount rate (wacc) and I don't think you can alter the nopat, although I could be wrong on this last point.

Some of the default growth rates are quite high, often 30% or higher.
I think it was Buffett who said that companies just don't grow faster than 15% for long.

The default growth rate for QSII is 30% (Jim--is this reasonble?); for NILE it's 31.5% (Hewitt?).
I keyed in 20 and 15 for both and got IVs of 82 and 59 for QSII, and 45 and 32 for NILE. So 15% has them undervalued; they are more or less fully valued at 20, if you think they are currently correctly priced, as Jim and Hewitt evidently think.

The wacc for QSII is 7.52%, which seems a bit low to my untutored mind in this case. The program's input for its nopat is 28.6%.
NILE's wacc is 8%, which also seems a bit low. Its nopat is 9.25%.

In addition to the late 90s mantra "this time it's different," and others, remember also the endless refrain that stocks are no longer valued on their earnings, now they are valued on their revenues?

Of the various factors that led to the overvaluation of stocks then, one of them surely was the absurdly low discount rates investors used (implicitly, if not explicitly) to value (imagined) cash flows. There was a certain peculiar method to this madness though, for as James Grant pointed out several times, the Fed's easy money policy contributed to the stock euphoria, particularly when it hit the monetary gas pedal in the first half of '99 in anticipation of the y2k problem that never happened. One of the effects of easy money was to lower the cost of capital, which paved the way for all those dodgy IPOs, "friends of Frank" allocations, etc.

VS












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