In case you are interested in what the future holds for WIND's share price, consider the following:
MCU Calendar Year EPS
Growth 1996 1997 1998 1999 2000
50% 0.67 1.31 1.94 2.91 4.19
60% 0.70 1.40 2.14 3.29 4.86
75% 0.75 1.57 2.54 4.10 6.40
100% 0.84 1.93 3.49 6.29 11.07
125% 0.94 2.41 4.92 9.97 19.91
136% 1.00 2.67 5.75 12.27 25.86
The table above contains my projections (not estimates) of WIND’s EPS by calendar year based on different assumptions mainly concerning production growth of 32-bit microcomputer processors (MCU). I roughly estimate the commercial share of each year’s production; then estimate WIND’s share of the commercial production; then multiply that by a crude estimate of that year’s average run-time license fee (which is assumed to reduce rapidly as volumes sky-rocket). Finally, I add in a separate estimate for future I2O license fees, since it is a significant big deal that justifies a separate estimate. A nominal growth rate is assumed for product tool sales, and services revenues are estimated using a simple linear fit. This gives total projected revenues for WIND.
WIND’s established cost behavior is projected statistically into the future. With rapidly expanding revenues, this method will prove to understate costs, since WIND management would be expected to increase spending at a faster than any historically determined rate. Consequently, the projections can be expected to overstate net earnings, particularly under the higher growth rate assumptions. Nevertheless, it is instructive to view EPS projected this way under the various scenarios - and estimate the share price the market would establish if any other these paths proved even approximately correct.
But which curve, if any, is correct (subject to the caveat about projections)? Pessimists might opt for the 50% growth path. This only results in an EPS of $4.19 for the calendar year 2000, with a conservative price per share of about $225, or about 7 times the current share price. Last summer H&Q stated that they thought MCU’s would grow from 27 million in 1994 to 840 million in 1998, for a compound growth rate of 136.2%. Thus H&Q is on record for thinking the best projection is the MOST AGGRESSIVE one! If H&Q’s aggressive stance comes true, the share price would increase by a multiple of 100 by the turn of the century.
What is the real point of this analysis? To show that something incredible is going on here. The potential for profitable growth for WIND is so big that, even at the current P/E ratio, only a small portion of the potential has been built into the price of the stock. Analysts imply 32-bit MCU’s will be growing at a compound rate up to 136.2% per annum, yet are unwilling to seriously project what this means to the market leader. (Incidentally, it would be silly for an analyst to estimate publicly the kinds of numbers shown in the table. If there is any delay in the growth, or if WIND has any difficulty maintaining leadership, the estimates could be way off base, which would rightfully bring on the wrath of mislead investors.)
From this I conclude that WIND has the potential to multiply share price from about 5 to over 100 times by the turn of the century, given that it can execute successively and maintain and advance market share. Fortunately, there is an excellent chance that WIND can meet this challenge because of: (1) the inherent difficulty of developing a stable RTOS with all the modern trimmings, consisting of proven company and 3rd party libraries for nearly everything, and (2) the high switching cost to organizations already committed to using WIND’s tools and RTOS, and (3) WIND is steadily improving its management talent and is currently organizing the company to operate efficiently at a higher level of operation.
Allen, |
