That's not the only problem. The company never looked cheap, but its ability to dominate the PC software market made it a financial powerhouse and investor's dream. They just don't bother doing it explicitly. That's something easier to imagine now than it was two years ago. Besides, he says, focusing only on earnings puts investors at the mercy of companies adept at jiggering the bottom line.
Cash flows are more difficult to manipulate.
The same firms' money managers, serving their well-heeled private clients, may opt for more conservative valuation methods. Even its strongest advocates say discounted cash flow is no sure bet. And it's a moving target as well. If the company blows its latest quarterly earnings, if its major customer files for bankruptcy, or if interest rates take a dramatic turn, you have to rerun the numbers. Keep in mind that an investor using a cash-flow model would not have bought Ariba at all when it was trading in the triple digits.