Peter,
Here's a post from Matt Belkin on his thread. Post#79 it's a little old but I think it answers some of your questions.
Regards
JC.
A good question Greg. As I noted in my response to Gary Baer about a week
ago, I think the market will, and should, focus largely on revenue growth
and reacceleration over the next several quarters. What is also important
is understanding where this growth comes from.
Wind is largely differentiated from most software businesses in that they
receive a royalty in addition to product license fees/service/consulting. I
know most of you know this, but understanding the growth of this royalty
stream is the lifeblood of investing in Wind River (in my own opinion). To
expand on my transparency post from yesterday, this is specifically a metric
that Wind management must break out for the investment community to fully
appreciate the story and for Wind to achieve the valuation and sponsorship
they deserve.
Now there are two components to valuation - growth and multiple expansion
(what you're willing to pay for that growth). I think most of the market is
on board in terms of valuing Wind on revenue growth for FY01. However, only
through further revenue visibility, will that multiple (currently about 7x
FY01) expand.
When earnings do come into play (FY02) I actually believe the story becomes
more compelling. Management left itself quite a bit of breathing room with
the 12% op margin guidance, considering EST was about 25% at the time of the
acquisition and ISI had significant reserves built into its model (+ many
other operating efficiencies realized through the merger). As we enter
FY02, I would be hard pressed to believe why this operating number could get
to 20%.
Now assuming revenue growth holds at 35% through FY02, op margins of 20%,
shares out of 75 mil or so, I get eps in the range of 1.32-1.37, or 29x the
current share price. That suggests earnings growth of over 135% yr:yr
(assuming eps of $0.55-$60c in FY01), and more importantly that the stock is
trading at a discount to revenue growth on a PE basis. Again, this
valuation does apply to Fy02 (calendar 2001) but folks, that's only the next
7 quarters. I've said it before and I'll say again, Wind is a STRONG BUY at
these levels -- I'll even add the R this time :) |
