Don: <triple digit p/e stocks get hammered>
I think we can all start to look forward rather than looking backware on this valuation issue. Most companies are valued not on what they did the last twelve months, but what they are expected to do in the next twelve, or eighteen, or twenty-four.
Sure, Rambus P/E is 220 or some such (too lazy to scroll to the bottom of the screen; sorry) but all the news of the past two weeks is sending a very, very clear message that beginning in January there will be significantly increased license revenues. These revenues will increase quarter by quarter as Rambus penetrates the DRAM marketplace for PCs. Sometime in 2000 revenues from Sony Playstations sold in Japan begin, followed by sales in U.S. and Europe. Each quarter more and more of the P.C., server and chipset market are penetrated with low end machines and laptop revenues being produced in late 2000.
O.K., Rambus earns 32-34 cents this year but is likely to earn , conservatively, four times that much, or $1.28 in the following four quarters. A P/E of 220 becomes a P/E of 55 at this price forward looking. Sure, you can say (1) the earnings aren't certain to occur (2) if they fail to materialize the market will hammer the stock, and (3) who would be dumb enough to hold this stock for a year if the price isn't going to to up, thereby achieving that 55 P/E.
but,
When we reach that point in time we will be looking forward yet again. 2000 may be a good year for Rambus, but, let me tell you, 2001 could (should) quadruple the earnings again. So, now we are north of four bucks a share, the stock still hasn't moved and our original P/E
of 220 is at 14. All the value managers will then buy the stock because the P/E is too darn low for such strong underlying cash flows
My point is that Rambus will either succeed in their business plan or they won't. Their current, trailing P/E is meaningless to me because I am already pricing based on revenues and earnings in 2002 and 2001. I may be wrong in doing this, but I do it with Cisco, MSFT, and virtually every tech stock I have ever owned. And, I firmly believe that if the market tanks that RAMBUS will be LESS affected than other stocks because the market will prize earnings growth above all. (In fact, Rambus held up well last August).
The only way I see a real honest to gosh negative happening in this sceanario is Rambus/Intel failing to deliver on their business plan. I do not see that happening, based on everything I am currently reading and hearing. BWDIK,. |
