Home > Uncategorized > Finance 101: how to price a stock

Finance 101: how to price a stock

October 31, 2005

Okay, so I took a semester of Finance in college and had a great professor – heck he literally wrote the book, which we got for free and got to keep (we got the “release candidate” for an updated edition).  Anyway, we spent a lot of time on how stocks are priced.  Pretty fascinating stuff, but it’s pretty simple in theory.  I don’t remember the numbers but it’s essentially the value of the company’s assets plus future earnings divided amongst all the shares.

So it’s interesting to see Thomas Hawk’s analysis of Apple’s announcement about selling 1 million videos on their new service, with the stock going up $3.05/share as a result.  Here are some key figures in his math:

  • Let’s assume that of the $1.99 that Apple charges per download that they get to keep half.
  • Roughly 1,578,947 downloads per month.
  • Each month has a 2% increase in videos sold.
  • By the end of 12 months under this analysis, Apple would have … cleared $20 million in earnings on their downloads.

So Apple’s stock is up $2.5 BILLION dollars in market cap on what potentially could be $20 million in earnings. This is on top of the fact that the stock today is already at a new 52 week high and trades at almost 40 times earnings with no other major news out on the company today.

It’s all about the HYPE baby!  Personally I can’t wait to see Jobs completely screw the compny again.  I saw another article (wish I remembered what RSS feed it was from) that lammented Apple’s product design, especially around the iPod line.  To paraphrase, they make a plain white box with no real interesting design features and one of the worst UI’s I’ve seen since DOS 5.1.  PLUS you get locked in to a propreitary device connection in iTunes (yes I know you can hack in with other tools, but that’s not what Mr. Consumer knows about).  When to short … when to short…..  I’ll leave you with a nice little picture from Yahoo’s stock tracker page.


Update: In response to the annonymous poster (why not post your name and let’s have an honest discussion?) I DO NOT own any MSFT stock.  Neither do I own Apple … or anybody else (outside my 401(K)).  I make no representation that I’m an expert stock picker.  I just question THE MARKET’s sanity.  Why value a stock at a huge bonus because of a relatively small increase in revenue?  Now, I also disagree with a lot of Stevie J’s business decisions (proprietary hardware for their computers has doomed the Mac OS to a few percentage points of market share), but he’s got a flare for reaching out to consumers (marketing) and Jobs isn’t really the focus of what I’m talking about.  The market is pricing APPL based on marketing flare, just like it did with the rest of the tech industry in 1999 and 2000 (note the chart above).  Pricing like this is going to burst the bubble hard down the line, and it’s going to hurt.

As for the Cubbies?  Well, the Red Sox won last year, and the White Sox just won this year.  I’d say the Cubs are in line for 2006.  🙂

Categories: Uncategorized
  1. Discfree.com
    October 31, 2005 at 1:14 pm

    So you took a whole semester learning how to value stocks huh? I better get on the phone with my broker and start shorting this thing on your recomendation. I mean what do all these hedge fund guys know anyway. They probably went to a community college where the professors were forced to use your professor’s book on stock pricing. If you could take a look through the text book and tell me when the Cubs will finally win the world series, then I can get on the phone and call my bookie before the betting lines get out of control. You and Hawk should stick to things you know about instead of trying to pump up your microsoft positions.

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