The question is whether or not WIND is overpriced, or will continue to increase in price, after its recent move to $40. Should you now sell it for a short term gain?
I just returned from the H&Q show in San Francisco last week, at which WIND (along with MWAR and INTS among lots of other technology companies) made 30-minute presentations, followed by more informal, question and answer type, break-out sessions with interested money managers. WIND presented well, and told a compelling story about Tornado being well-accepted, and more about I2O. I2O appears to be everything I indicated it would be in previous posts. In the breakout session we even discussed the possibility of reporting run-time license fees separate from product revenues. I will discuss the implications of this in later posts.
WIND started their presentation by observing that by the turn of the Century, GM will ship more computer power than IBM. By the year 2000, GM’s vehicles will contain more computers power than all of the computers built by IBM. By the same token, WIND does even rank the automobile very high in the list of industries that are contributing and that they expect to contribute the most to their revenues.
Think about it. If I2O is real (and watch for the Intel adds that will start to appear soon in trade magazines), then the royalty stream from that one deal will probably surpass WIND’s current revenue once it starts to ramp up next year. That story is sensational. Everyone at the conference should have been buzzing around about I2O and what it and all the other marvelous deals will mean for WIND.
INTS and MWAR also presented at the show, and although I was not able to see INTS, I did attend MWAR’s presentation and break-out session. MWAR has tremendous opportunity in the near term with their wireless products support thrust, working closely with Motorola and Systemsoft (involving PC Cards and power management needed for hand-held portables), and a developing opportunity as the de facto standard in interactive video.
But what happened? None of the speakers that I heard, nor did any of the H&Q analysts mention Embedded Systems or pick any of these firms as near-term over-achievers. Internet was hot. Telcoms were hot. Geoworks and their version of the smart cellular telephone was extremely hot. Semis were of great interest given their recent bust and concerns about growth in the PC market. But good old high-end Embedded Systems with proven, robust, scaleable, portable real-time operating systems were completely overlooked.
What does this mean for the price of WIND’s stock? It means the story has not even begun to be built into the price of the stock. A few astute investors/funds understand the potential and are buying all three of these companies (the reason these companies are somewhat pricey based on trailing earnings), but most money managers still don’t know about the explosive and dominant position that will be obtained by at least WIND, and probably all three of these companies, progressively over the next few years. I bet that by the turn of the Century these three companies will have provided more operating systems operating on more computers than all other companies from the beginning of time. Not only that, but probably in the year 2000 alone these companies will provide more operating systems running on more computers than all other companies from the beginning of time (including these same three companies).
Why are high-end Embedded Systems companies being overlooked? For many reasons, of which some are:
(1) They disappointed relative to their hype when they first began going public a few years ago, and are now in the "show me" category.
(2) Smart gadgets have been around for decades, so what’s new? The smart gadget companies do fine , but they haven’t shaken up conventional computing paradigms. (The difference between smart gadgets and an embedded 32-bit Microcomputer running a multi-tasking, preemptive RTOS, with a full suite of communication protocols, and other application-specific libraries, and connected to billions of other similarly capable, embedded computers I suppose cannot be appreciated in the abstract by most industry observers.)
(3) All three companies hide their run-time license revenues in their financial reports to the public. This prevents analysts who do understand from knowing, or even safely guessing, the size and growth of this to-be-dominant source of revenue. To give you yet another feeling for the size of this potential revenue, H&Q states that 27 million 32-bit microprocessor units were sold in 1994. These are the processors that normally demand a sophisticated operating system. Of these probably a half or more used non-commercial, so-called roll-your-own operating systems. They estimate that in 1998, just four years later, 840 million will be sold. Probably no more than 25% of these will be roll-your-own. Although unit royalties are reduced for big deals, even so, no matter how you twist these numbers, the royalty stream to these three companies, and specifically to WIND, should ramp up rapidly.
Only two analysts follow WIND. As I had guessed, one already has raised estimates for FY 1997 EPS to $.74 and FY 1998 EPS to $1, with a sustainable growth rate increased to 45%. I expect the other to increase estimates after the next analysts conference call on May 21 - after the first quarter’s estimates are exceeded because of the I2O solicitations by Intel and fruits of the Tornado campaign (both resulting in more than the usual increase in tools sold for the quarter).
Conclusion: Short term anything can happen to WIND stock price, but mid- to long-term it will continue to climb at a minimum rate of 50% per annum well into the next Century.
Hope this helps.
Allen, |
