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Technology Stocks : Vitesse Semiconductor

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To: gda who wrote (1248)	3/4/1998 2:55:00 PM
From: slob	Read Replies (2) of 4710

gda, VTSS's valuation is based on 30%+ Net Profit & 40% growth. If you look at reasonably sized companies consistently producing these numbers you will find they are valued at trailing P/E's of between 30 and 60. If you know of any companies that fall below a PE of 30 than please tell me because I've got lots of free cash that's looking for a home. In certain segments of the semi industry (PC's in particular) growth rates are discounted because of the short product life times and dumping that usually occurs in the mature part of the product life. VTSS is NOT in the PC industry and its diverse customer base makes it very difficult to impact them by attacking 1 or 2 products. If you have a strategy for attacking VTSS than I'd be glad to hear more about it (email me at si_slob@hotmail.com). With reference to your particular example ($2B to invest) Firstly what's relevant is the "Discounted value of future cash flow" plus the residual value of the investment at maturity. If VTSS maintains its growth rate and profitability its market cap in 2002 will be between $3.5B and $6.0B. During this period it will have generated cumulative earnings of around $280M. So based on Market Cap of around $2B I will get between 180% and 300% of my investment in just 4 years. That's significantly better than your puny 5% to 6% p.a. return. You seem to think that growth and margins will come under a lot of pressure making my rosy picture smell slightly rank. I'll accept this IF you can show me any evidence that its happening. For this type of evidence I tend to look at new product margins Vs mature product margins, it also helps if you include some estimate of product life times (i.e. to make a crude guess at LNR). I've done this and concluded that VTSS is NOT under gross margin pressure. The other area that often kills growth companies is the expense line. Now VTSS is actively recruiting engineers and paying top dollar, it is also opening design centers at an alarming rate. This could be their undoing, however its the only way for them to continue their revenue growth so it is a gamble they / we need to take. If things start to get out of control it will show up first as a drop in net margins, this will be the time to jump ship but for the moment I'll keep my money right where it is. Slob

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