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Technology Stocks : Wind River going up, up, up!
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To: Curly Q who wrote (1169)5/30/1997 2:12:00 PM
From: Mark Brophy   of 10309
 
Wind River and Compaq are market leaders.

There are smaller competitors like Dell and they may grow faster than the market leader, but I chose Compaq because it's a company that everyone knows and can easily understand. If Compaq maintains their margins, market share and P/E ratio, and the PC market continues to grow 17% annually, the stock price of Compaq will also rise 17% annually. I reckon this is a low risk bet for a technology company, so I chose it as an appropriate benchmark for Wind River stock. If you prefer a diversified portfolio, you can probably also get a 17% return from conglomerates like HP, TI, and Motorola.

The company most similar to Wind River is Phoenix Technologies, but I chose not to use it as a benchmark because most people are unfamiliar with the company. Wind River is the supplier of choice for system software for the real-time systems industry and Phoenix has a similar position in the PC industry. Both companies have nearly identical revenues ($70-80m) and profits ($13-14m) for the last 4 quarters and they sell their products mostly on a royalty basis to technically sophisticated customers rather than end users. They both have a few pesky little competitors that keep unit prices low and margins from rising as high as Oracle, but their businesses are too small and unimportant to attract competition from big companies like Microsoft.

Wind River and Phoenix are growing faster than the real-time and PC system software markets because their size advantage over their competitors gives them some economies of scale in software development. The real-time software market is growing because 32-bit processors are being used more often in new designs and Wind River has a good chance to grow 40% annually for the foreseeable future. Phoenix is growing 30% annually and is likely to continue at that rate because Intel needs better system software to ward off the emerging challenge posed by network computers.
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