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Technology Stocks : Vitesse Semiconductor

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To: gda who wrote (1263)	3/9/1998 1:10:00 PM
From: slob	Read Replies (2) of 4710

gda, On engineering based valuations vs financial based valuations: From reading your posts it is appears that you have an IC engineering background and have probably even worked in GaAs. Clearly this qualifies you to talk about the relative merits of one technology vs another and to develop a company valuation based on the value of their technology. What you are doing, is establishing valuations, based on the sustainablity of the technology competitive advantage that VTSS enjoys. In effect, with your short position, you are saying that gross margins are coming under pressure and that this will negatively impact growth and earnings. I think you need to step back a little and view VTSS through the eyes of a financial wizard or fund manager. From my experience these financial experts look for 2 parameters 1) Free Cash flow ( a function of earnings and capital requirements) 2) CAGR (Cumalitive annual growth rate ) These are 2 areas in which VTSS excels. Now in developing their valuation models they will usually include some RISK factor. Risk for them is NOT measured in terms of technology alternatives, it's measured as a function of a stocks Volatility. There has been a lot of work done on the correlation between Volatility and industry specific fundamentals, there has been even more work done on Volatility based Risk models, heck! there has even been a Nobel price awarded for this work. Secondly Risk is managed by portfolio diversity. So where does this get us: The technologist says: I could do the same for less, there are cheaper and better alternatives. VTSS is overvalued! The Financial Analyst says: This is a real growth stock opportunity, one of the best looking stocks in the market I need a few stocks like VTSS to get my returns up a little. Who will win is the question? Lets look at the market fundamentals for VTSS's stock. On the Technology side we have a few individual Investors, probably totaling less than $100M stocks. We have technology Insiders controlling $300M to $400M. On the Financial side we have $1.5B riding with VTSS AND a lot of growth / technology fund managers with very sick looking portfolios that need some spicing up alla VTSS. These financial type will need to see VTSS miss its numbers OR for lots of Insider selling to start before it falls off their radar screens. I'd really like to hear you respond to the Financial side of the valuation equation because I believe that this market is driven more by the excess money flowing into funds than by any realistic "return on investment" or Cost of copying the technology. Slob

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