>Will WIND prevail over its competitors, in particular INTS?
I think WIND is the embedded systems toolset and RTOS leader, and will continually gain market share. However, I doubt that WIND will "prevail" over its competitors, at least over the next five or ten years. The reason is the market for embedded systems of the type that WIND, INTS and MWAR make possible is growing so large and has so many nooks and crannies, that all three companies should do extremely well for the foreseeable future. However, the I2O deal in which Intel selected WIND is suggestive of a winner-take-all possibility based on economics.
Through acquisitions and because its original business was in design software, not embedded systems, INTS is not a pure embedded systems play such as WIND and MWAR. Consequently, I have more difficulty understanding the INTS business model, making it difficult for me to appreciate its upside potential. Fridays 6+ point jump in INTS stock price suggests the market expects a continuance of INTS stellar performance.
>INTS and WIND have very high PE right now, do you see a problem with that?
Investing in high-technology stocks means you have to come to terms with PE ratios and volatility.
If any company with a high PE ratio disappoints with lower than expected earnings, the market usually exacerbates the disappointment by lowering the PE ratio as well (because the future probably looks less attractive than before), and the stock gets tanked. That is about the only reason I can think of to pay any attention to trailing PE ratios. But that is not reason enough to judge shares too expensive.
The value of a share in any company is not indicated by the trailing PE ratio. The price is always equal to the present value of the perceived future free cash flow accruing to that share. If the future for the company, i.e. the story, is rich and credible, share price will accelerate much faster than earnings, pushing the PE ratio to lofty levels. The market always capitalizes the value of any stock at the current time-value of money. This is what is happening now to the Embedded Systems group: INTS, WIND and MWAR. However, if the future were completely understood and believed by the market, the price of these company’s shares would be increasing about 10% annually, even though their earnings are still expanding by multiples. They would have to be priced much higher they are now, their true intrinsic value, for this to make any sense.
The job of the long-term investor in high-technology stocks (almost an oxymoron because almost all high-technology stocks are lousy investments in the long term) is to find stocks whose story is not fully understood and/or believed and therefore not fully priced by the market. It is not to worry excessively about trailing PE ratios.
In a recent post, I presented some earnings projections for WIND. Knock them down a bit to account for my caveats, or even better, make your own projections, and then ask yourself what the value of the company will be in the year 2000 if those projections turn out to be even nearly true. The present value of that number is the approximate current value of WIND shares. If you have a compelling need to look at PE ratios, calculate it on future, not trailing, earnings.
The present value of these company’s shares, therefore, is limited not by the size of the trailing PE ratio, but by the expectations and credibility of the unfolding story. That’s the purpose of this thread: to analyze this story and understand its implications early. Since the story is so important in high-technology investing, you will only be able to explore a few of them thoroughly, which means you will be concentrating your investments. Since disappointing high PE stocks get tanked, and your investments are concentrated, it makes the story even more important.
There is only one rule to investing: Core stocks (the ones you have thoroughly explored and like) may experience high volatility, but you are never wrong about the fundamental outcome, so that you never end up loosing money in real terms.
One last important point about pricy-ness. If I were to bracket the true (intrinsic) value of WIND’s stock, with a lower and upper price point, I would have a high degree of confidence in the lower, buy-in price. I would have almost no confidence in the upper, sell price. This is why I tend to buy and hold core stocks; it is almost impossible to say when the price exceeds fair value and should be sold. The reason for this with many stocks, and certainly a stock like WIND, is that anything can happen on a given day that substantially adds to value. A takeover announcement could cause WIND’s share price to double in a single day. Another announcement like I2O could cause it to gap up. How many big deals are out there that could move the stock significantly? Hundreds, thousands…
Hope this helps. Your question properly touches on a concern that every serious investor needs to contemplate and come to terms with. The future for WIND stock price is favorable, but the road will not be perfectly straight up. I try to train myself first to understand, then accept, then appreciate volatility.
Allen |
