Bateman,
In your Nov. 6, 1997 post, you likened RMBS to CSCO. That has a lot to do with why I've been buying the stock. My take is that the potential rewards in the near term far outweigh the risk. Now let me elaborate.
I believe that you can greatly reduce the risk of holding individual technology shares by undertaking certain investigations and disciplines prior to investing. They are as follows:
o Look at technology companies that were well received at their IPOs;
o Look at recent IPOs that were venture funded by great venture capital firms;
o Look at recent IPOs that were underwritten by great technology underwriters; and
o Purchase aged IPOs at reasonable prices.
1. Look at Technology Companies That Were Well Received at Their IPOs
I have been interested in investing in IPOs since I read Peter Lynch's Column titled "IPOs Explained" in Worth Magazine's March 1993 issue. Lynch explained that the greatest returns in IPOs often occur well after a company's initial offering. The article listed about 10 IPOs that had had phenomenal gains after being public for two years. They included Microsoft, Amgen, Blockbuster and Home Depot. I noticed that almost all of them had done well almost immediately after going public. That told me that the market knows that a company may be great from the start. But the problem is that the market thinks a lot of companies are great that don't turn out so great later on.
I read a 1996 interview that Morgan Stanley's Mary Meeker (she wrote the "Internet Report") gave that mentioned the same issue (see cnet.com. The author ask "Statistically, is there any correlation between the success of an IPO and a company's long-term financial success?" She answered "You know, I don't have any data on that. My instincts and experience tell me yes, but I don't have the facts. It's rare that a company that ends up being very successful wasn't well-received at its IPO. The opposite is something I just don't know the answer to."
To pursue this I started collecting copies of each years January 15th issue of Standard & Poor's "Emerging and Special Situations." This publication lists the "25 biggest IPO winners" at the end of each year. There is also a July issue that does the same for mid-year results.
In the July 1997 issue, RMBS's name appeared on the list as the biggest IPO winner of the first half of 1997. It was offered on May 14th for $12/sh by Morgan Stanley and closed out the second quarter at $46.50/sh. It was well-received. It will make the year end list barring a disaster.
2. Look at Recent IPOs that were Venture Funded by Great Venture Capital Firms.
Some of the great venture capital firms include Sequoia Capital, Kleiner Perkins, Venrock, Sevin Rosen and Integral Capital. This kind of backing reduces the risk of holding the stock of a company like RMBS for three reasons:
o Top venture capital firms are in the business of assessing which product markets are potentially huge. They have the smarts and the resources to make informed judgments about these matters; and
o Top venture capital firms provide management discipline to start up companies like RMBS. For instance, you will seldom see a venture backed start-up that doesn't have a CFO with a "Big 6" accounting background. They usually make sure that the marketing people are also top notch. And when they retain an interest in the stock after the offering, they often fire the CEO if the company he founded starts to outgrow his abilities; and
o Finally, top venture capital firms can often cherry pick the most potential start up firms to invest in. Think about it. If you have started a company, you want the best people funding and assisting you in its development.
For these reasons, venture backed IPOs usually do better in after markets than non-venture backed companies. See "Looking for Lasting Profits in IPOs" in Worth's September 1996 issue which explains Beth Dater's philosophy about investing in new IPOs.
Two weeks ago I spoke with a Silicon Valley venture capitalist who mentioned a study by researchers at the University of Chicago. It found that the after market performance of IPOs funded by venture capital firms outperformed the average IPO by a couple percent. He added that there is a belief in the venture community that the top VC firms' IPOs do much better in the after market than the average venture funded IPO. While his comments are based on anecdotal evidence, all you have to do to believe it's true is check out the network of funded companies listed on the home pages of Sequoia Capital or Kleiner Perkins.
Now, let's assume that you bought and held $1,000 worth of stock at year end each time a Sequoia Capital or Kleiner Perkins IPO made the January 15th issue of Standard & Poor's "Emerging and Special Situations." Again, this lists the "25 biggest IPO winners" of each year. How well would those investments have done as of November 13, 1997? The last column is compounded annual return since the year-end of each IPO.
Company VC IPO Date IPO Price IPO YE Price SH Splits Cmp ROR
Cisco Seq 2/16/90 $18.00 $44.88 32:1 79%
Am.On Line KP 2/20/92 11.50 29.25 8:1 84%
Microchip Both 3/18/93 6.50 39.00 3.4:1 35%
Intuit KP 3/12/93 20.00 42.63 2:1 9%
Ascend KP 5/13/94 13.00 40.75 8:1 71%
Netscape KP 8/9/95 28.00 139.00 2:1 -35%
Arbor Soft Seq 11/7/95 17.00 47.25 1:1 -23%
Xylinx KP 6/12/90 10.00 13.75 3:1 31%
S3 Both 3/5/93 7.50 16.88 4:1 11%
NTAP Seq 11/20/95 13.50 40.13 1:1 12%
Shiva KP 11/17/94 15.00 39.88 1:1 -40%
Lest anybody misunderstand the last column "Cmp ROR", it means that Cisco has returned a compounded 79% between 12/31/90 to yesterday's close. That level of compounding means that the shares you would have purchased on 12/31/90 for $44.88 each were worth $2,448 yesterday before adjustments for splits.
Now, it's obvious that all of these IPOs haven't been winners. But had you avoided purchases of the IPOs that competed directly with Microsoft, Oracle, Intel and Cisco, you would have avoided all the losers and generally had spectacular long term returns. And these numbers include the big recent drops in the prices of ASND, XLNX and SIII.
While RMBS isn't a sure thing, consider that it was venture funded by Kleiner Perkins and Integral Capital. They currently retain a significant interest in the common stock amd RMBS doesn't compete with MSFT, ORCL, INTC or CSCO at least last time I checked.
3. Look at recent IPOs that were Underwritten by Great Underwriters
Some of the great technology underwriters include Morgan Stanley, Alex Brown, and Hambrecht and Quist. These underwriters seem to get the best firms to take public. To illustrate, consider that either Morgan Stanley or Alex Brown was the lead underwriter of all of the IPOs listed above except S3, Network Appliance (NTAP), and Shiva.
4. Purchase Aged IPOs at Reasonable Prices.
This is the hard part. That's because RMBS trades a little like a zero Coupon bond in which the payoff is at some uncertain date in the future in some uncertain amount. Some shorts argue that its trading at 100 times 1999 EPS estimates and therefore it's grossly overvalued. Maybe, Maybe not. It all depends on what the earnings are after that period. And the earnings will depend on the acceptance of the technology and the ability of RMBS to expand the uses of the technology into markets like the high end servers, workstations and communications equipment.
One thing is certain. RMBS has some smart people who appear to be very right on their technology. And as Bill Gates and Andy Grove have demonstrated, smart people can win for a very long time.
In conclusion, if you do all this stuff you can still be wrong but I'm betting that you will be right much more often. That is what the risk reward tradeoff means.
Regards
David |
