Your's is not the only post expressing concern about WIND stock price being impervious to exciting news releases recently. There are many reasons why the market might ignore such decidedly good news, which are worth noting.
As background, the market is very much aware of WIND's 80 PE ratio, with which it has fewer and fewer problems as time goes by, due to the increasing confidence the market has in WIND delivering analysts' estimates plus a little bit more each quarter. The market is willing to pay a PE of 70 for this fiscal year EPS, and even a PE over 50 for FY 1999 EPS. But the market has lots of trouble wanting to pay much more than these ratios for an established operating company, albeit one executing perfectly according to plan.
In the meantime, INTS clearly is awakening, preparing to make a splash with pRISM+, at least for a beginning combination of hosts and targets. This, coupled with the possibility that INTS might be returning to the gravy train with the soon-to-report quarterly earnings, has encouraged investors to renew their interest in INTS, no doubt somewhat at the expense of WIND.
Now, along comes some news. In particular, consider the DSP WiSP announcement, which clearly could not have been discounted previously by the market. The market immediately liked what it heard, and moved the stock a couple of points on large volume, only to leak off over the next few days back to about where it was prior to the announcement. You might think the market is stupid for not appreciating fully the implications of Tornado for DSP, but before you do, let's look at it from the market's point of view.
The first thing the market thinks, like us, is "WOW", and pops the price a couple of points. Then the market thinks, "I know this is very good news, but perhaps Tornado for DSP is simply a necessary endeavor enabling WIND to continue its wonderful growth, much of which I have already discounted in the current price. On the other hand, maybe the DSP expansion will open up huge new opportunities in its own right, and even add synergy propelling WIND to an embedded systems monopoly worth far more than the current price. Since I don't have the foggiest notion about DSPs, MPUs or I2O, or much else in high technology, I will assume the former unless I receive confirmation of the latter."
Unfortunately for shareholders who feel disappointed with price movement following the announcement, there has been no confirmation that the DSP is indeed additive, other than a few optimistic posts on this thread. Certainly it is too early for significant design wins to have been announced with associated ample future rewards. But worse for the stock price, analysts did not respond by revising estimates. If the announcement were followed a day or two later by analysts upping, say FY 1999 estimates significantly, then the market could price Tornado for DSP accordingly. Without any noticeable upward revision, the market will simply continue to believe it has already discounted the news in the expected growth rates.
For long-term shareholders accustomed to the market's inability to think on its own, the recent price action confirms that their past success with WIND stock was not due to chance alone. There is nothing that makes me happier than when I get confirmation that the market suffers inefficiencies, providing incredible opportunities to profit richly while feeling good about helping the economy better allocate resources.
We know the analysts will not raise their estimates significantly without guidance by management, and as we all know, WIND management has no interest in having to stretch each quarter to make earnings estimates, simply for the sake of meeting ever-more-difficult earnings estimates. If that means that WIND's future cannot be properly priced by the market, then so be it. Let the price be a bargain for the enlightened investor.
The fact is that the DSP initiative is big, very big, and is hugely synergistic with both VxWorks and IxWorks. I believe it most certainly will boost earnings beyond my current expectations, but I have no idea yet by how much, since I have yet to factor DSP into my financial model of WIND.
By the way, I suspect the analysts are finding more and more difficulty keeping all the goods news out of their estimates. For example, after reporting the obligatory minor increase in estimates after the last earnings report, the H&Q analyst could not resist putting a dollar value on next year's contribution to earnings from I2O. So while next fiscal year EPS was increased officially from 70 cents to 80 cents, it was pointed out that, "we believe royalties [next fiscal year] from the I2O initiative could ultimately yield earnings closer to $1.00 per share."
Allen |
