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Technology Stocks : Wind River going up, up, up!
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To: dylan murphy who wrote (2129)9/27/1997 11:08:00 AM
From: Mark Brophy   of 10309
 
Re: Price/sales as a valuation tool

Wind River should have a higher price/sales than Radisys because they produce all the software themselves, whereas Radisys resells many components made by third parties. Wind River should have higher profit margins.

Both companies made about the same amount of money last year and are likely to grow at a 40% rate for at least the next 2 years. A more appropriate valuation would give each company a P/E = 40 after subtracting out the book value, which is higher for Wind River than Radisys.

Using that calculation, Wind River is worth $671m, or $24/share. Radisys is worth $647m, or $80/share. However, it doesn't make much sense to get a riskless 40% return, which would be the case if you could be assured that a year from now both companies would still have 40% growth prospects for the foreseeable future.

Both companies face serious challenges growing at 40% forever, so I believe the above calculations represent fair value. You'll still make much more money with Radisys, even after the recent Radisys runup and Wind River decline. Perhaps the momentum investors are rectifying the situation now. Eventually, earnings results will rule the day. The former Intel managers at Radisys have more relevent experience.
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