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Technology Stocks : Sapient (SAPE)
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To: mchip who wrote (75)10/1/1998 6:05:00 AM
From: Pancho Villa  Read Replies (2) of 178
 
MCHIP: You make good points and I think I have good answers. First a high PE business is priced on earnings/revenue growth. I have no doubt SAPE is getting contracts but its growth rate has diminished so a way to catch up is to compress revenue recognition. This unfortunately backfires as you reach steady state. if for example your earnings/revenue growth rate is 20% you can make it look like 30% using revenue recognition compression but you cannot do this forever unless you start making up contracts which I assure you SAPE is not/will not do. I don't disagree that SAPE plays the accounting game like many others. I don't say they are violating GAAP. Do you know what happens to stock prices when investors expect a certain growth rate and growth expectations are revised down? The stock takes a nose dive. (why do you think the price of SAPE has gone down? IMO it will continue to go down, possibly dreasticaly when investors confirm lower growth is a reality).

One more thing on cash flows, big picture changes such as going from operations cash flow positive to cash flow negative are significant important changes that should no be ignored. The statatement of cash flows is the one that is most difficult to tamper with. Still some manage to tamper with it by classifying cash fows in the wrong categories (For example, IMO FMNX books money that belongs to cash flow from financing activities as if it was cash flow from operating activities - in case you are wondering I have an MBA with managerial and cost accounting as concentrations).

SAPE does control cost better than other software companies, they have to as they are a fixed price contractor. However, the fixed price contract is being absorbed by developers working 60 hours +/week (I know people there). As you rightly point out this guys are willing to work their ass off as the fixed salary is complimented by stock options which BTW due to current accounting rules appear in a foot note instead of as a cost item in the income statement. This is one of the things the SEC want s to change. So they work their butt off because of the options but at SAPE and many other companies in which options is an important part of compensation, lately people aren't too happy (if you draw a stock pirce chart you will see why this is the case).

The bottom line is that there may be fixed price revenue but fixed development cost is more debatable. So put together lower growth and potential margins compression and you have.... a molotov cocktail (do you know know what this is?)

Good questions. I hope you got good answers.

PS: I wouldn't wait for the next 10Q if I were long.
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