Valuation I - From the GGList
Subject:
[gglist] RE: Will Wall Street ever overvalue a gorilla?
Date:
Sat, 13 May 2000 10:23:40 -0700
From:
Geoffrey Moore <gmoore@exchange.chasmgroup.com>
Gang,
In the book, we argued no, but I have to say that the Internet early market
enthusiasm in investors probably carried all stocks too high, so that the
answer now may well be yes. Here's what I think is happening. As the
Internet stocks soared, investors began to use them as a benchmark for
relative valuation. That is, if company A is worth X, then company B has to
be worth Y (where Y is some function of X, as in 2X or 0.5X). As long as
the comparables were traditional P/E stocks, this form of relative valuation
was going top always undervalue gorilla stocks. But when the Internet
stocks themselves became benchmarks, so that if we said "since Amazon or
Yahoo or eBay is worth X, then Cisco, Microsoft, or Oracle must be worth Y,"
I think we entered the "over-valued zone."
Once again, the key thing to remember about the market is that it focuses on
getting relative valuation right and lets macro effects correct for absolute
valuation. In both cases above there is an "error" in the relative
valuation lens -- traditionally causing it to be too low, currently (I
speculate) too high -- but in either case, the pecking order established by
the lens is right, it is simply the distances between objects that is
distorted.
So what? I think this brings us back to traditional gorilla game theory
which says, once the correction settles out (and then I would wait ninety
days to let it start to come back, because I have a fear of false bottoms)
and the market starts to come back, the relative valuation lens will have
been "cleared," and my expectation is we will back to using P/E stocks as a
benchmark, and the old dynamics will apply. In the meantime, this would be
a terrible time to sell a gorilla. As for all the other stocks that may be
in your portfolio, the gorilla game argues that gorillas should outperform
them. We shall see.
Geoff
Geoffrey Moore
Chairman, The Chasm Group
411 Borel Avenue, Suite 550
San Mateo, CA 94402
Valuation II - Cisco from Lightreading
lightreading.com
Everybody's favorite game this week seems to be "name Cisco's real value," and the results do
not look good for the world's second-most valuable company.
Cisco Systems Inc. cisco.com shares continued to fall throughout the week, even
after a solid earnings report. The slide started on Friday, after Cisco announced its $5.7 billion
acquisition of ArrowPoint Communications arrowpoint.com. Over the weekend, an
article in Barron's barrons.com, the eminent bear of the financial press, grabbed
headlines by pointing out the high price of Cisco's stock.
Cisco stock is trading at an exorbitant price/earnings ratio? What a surprise! The company has
been on an acquisition spree that's dilutive to its share value? You don't say!
These tidbits of insight are about as fresh as the fruit cocktail on a Las Vegas buffet table. |
