Fuchi, one line of thinking about Cyrix that was not raised in this thread:
Academics have "discovered" in the last few years that stocks are very much like options, in the sense that you can only lose what you paid for it. That may sound silly, but it is actually a valuable insight.
For example, suppose that one thinks that Cyrix stock price has a 20% chance of selling a zillion chips and making a lot of money in five years, and a 80% chance of being a failure. These are very pessimistic estimates, in my view, but let us use them to make a point.
Suppose also that in the "good" scenario Cyrix can easily pay its current debtholders and the stock price flies to $200. In the "bad" scenario Cyrix defaults on its debt and the stock goes to $0. (Again oversimplifying and being conservative)
Under these circumstances Cyrix should be worth about $40 a share to make it a fair bet (0.2 x $200 + 0.8 x $0 = $40).
The idea is: if Cyrix loses a lot of money and goes bust the holders of Cyrix debt absorb part (most?) of the losses, while their upside if Cyrix is a runaway success is limited (just like the seller of a call option). The shareholders only lose their stake in the company in the "bad" scenario, but have unlimited upside in the "good" scenario (just like the holder of a call option).
There is an asymmetry in the distribution of gains and losses between shareholders and debtholders, and this makes the stock more valuable than an expected calculation of earnings would imply. Indeed, it may be that the average of Cyrix's earnings in the two scenarios would be negative in the above example. (Of course that would mean the debt holders did something stupid when they lent money to Cyrix. I am not saying that is the case, because of course this is just an example based on pessimistic assumptions.)
I think most people do not realize that Cyrix's stock has a lot of "option" value, and is therefore very much undervalued by the market even under very pessimistic assumptions.
Of course, the "extra" value due to the option-like characteristics of stocks exists for all stocks, but it is much larger in the case of a one-product company like Cyrix that faces intense competition and has a large variance in the distribution of expected returns. |
