Why Was the Stock Price Drop So
Large?
⚫Recompute the valuation models in questions 2 and 3,
but in each case assume that sales growth and
margins immediately fall back from the 2000 levels to
to 1999 levels in 2001
have a huge impact on value
⚫Remember that sales growth is rapidly mean reverting
What Happened at Intel?
Q1
‘00
Q2
‘00
Q3
‘00
Q4
‘00
Q1
‘01
Q2
‘01
Q3
‘01
Q4
‘01
(YoY)
Gross
Margin 63% 60% 64% 63% 52% 48% 46% 51%
99 00 01 02 03 04 05
20
30
40
50
60
70
80
602
274
Volum e in M illions (m ax/avg)
Intel Corp. (INTC)
22-Jan-1999 to 20 – Oct-2005 (W eekly) H igh: 75.813
U .S . D ollar Low: 12.950
Las t: 23.550
Data Source: Prices / Exshare ©FactSet Research Systems 2005
–0.2
–0.15
–0.1
–0.05
0
0.05
0.1
0.15
0.2
–0.07 –0.05 –0.03 –0.01 0.01 0.03 0.05
Forecast Error
Abnormal Return
High Growth
Low Growth
Earnings Surprise Response Functions
for High and Low Growth Stocks
Key Takeaways From Intel Case
⚫Sales growth rates and gross margins are usually the
most critical forecasting assumptions.