Ramsey:
<<Are you allowing this number to influence your
investment decision, without validating it yourself?>>
I'm not letting any numbers influence my investment decision. I am a fundamental investor, who like Allen, attempts to discover the intrinsic value of any business. This comes from understanding the products, the likely sales growth, likely profit margins, potential competitive threats, etc. All with the hope of discovering the true cash flow and true earnings of a company many years out into the future.
However, with regards to the WIND and QCOM debate, it is unfair for you to use 4 quarters trailing earnings for WIND, while using projected 2 quarter numbers for QCOM. QCOM's trailing 12 month earnings are .28, leaving them with a trailing multiple of 218.
Again, I'm not using this number for anything with regards to fundamental value, merely as a guide to determine what the MARKET thinks about likely future earnings. As you indicate, the STREET's projections for coming quarters call for a dramatic improvement in earnings, leaving the 2 past, 2 future quarter PE at 78. But this is only part of the story.
My point in bringing up QCOM was this is a company with approx 820 million in sales, versus WIND, with only 64 million in revenues. For whatever reason, the MARKET seems much more confident that QCOM will not only grow their revenue (Allen's estimates are for more than 3 billion in a few years), but also their profit margin, as they successfully digest operational issues and start to turn a bigger profit. As I said, the MARKET seems less comfortable that WIND will
grow their revenues and earnings, as evidenced by the current unwillingess to award the premium multiple to trailing 12 month earnings that QCOM currently enjoys.
My own theory is that with the current market's love affair for blue chip, big cap, nifty fifty type stocks, portfolio managers are in love with what they can see and feel. It is much easier for analysts to believe QCOM will start making money from selling digital phones (a market that everyone can see) or that Compaq will make money from selling boxes (a market that everyone can see), than it is for them to believe that WIND will make money from royalty streams and design wins. After all, who can see an embedded computer?
In other words, the MARKET probably believes that a company with 800 million of revenue is a more viable business than one with only 64 million of revenue, and therefore much more likely to translate into future earnings. But as we all know, the market is frequently short sighted. My own thoughts are that the MARKET is being extremely short sighted with regards to WIND, while less so with regards to QCOM. Perhaps both represent compelling value here. Only time will tell.
Regards,
Jason Cogan |
