While economics rules the roost in the long-term, and WIND's stock price absolutely must reflect its economic performance over time, clearly this stock market has a mind of its own. For the last four or five years, it strongly prefers mega-cap, stocks. Over the last year or so it fell head over heals for Internet stocks. All remaining stocks that got meager leavings did it the hard way, by earning them crumb by crumb.
I think the large-cap, small-cap divergence is so interesting as to be almost captivating. Why would any seasoned investor pay a PE of 80 for fast-growing commodity company like DELL? It is an economic impossibility that DELL will be allowed to continue enjoying hyper-growth, no matter what you believe about their business model or their talented managers. That's what competition in a commodity market is all about, and if the PC sector is anything it is competitive. Exactly when DELL will be slowed, I'm not sure, but I am certain it will happen. First margins and profits, and then even revenue growth will regress to the industry average.
In defense of the market, many if not most small stocks have failed to sustain superior performance (although so have many large stocks, which the market often quickly forgives and forgets.) The market has trouble picking small-stock winners from losers in most sectors, and seems to have given up even trying.
In stark contrast, many Internet stocks are enjoying hyper revenue growth, which the market blithely uses to justify maniacal valuations. I don't think I have to tell you that economics guarantees that most of the current Internet stocks will disappoint hugely, causing most to crash. If you don't know why this is true, then you should invest only in mutual funds or keep your money in CDs.
But, like the market, let us set economics aside for a moment, and look at WIND in a different light, and I don't mean using Technical Analysis either. Let's look at investor psychology to guess what might happen over the near term. Of course the operative word here is guess, because nobody knows what this market will do short term.
Since WIND is not a large cap stock, given the apparent preferences of this stock market, WIND's big advance in price must await discovery and enchantment by the market of the embedded systems sector. To date, the embedded systems sector has either gone unnoticed by the market or disappointed it when it has been noticed – with the single exception of WIND. What might change this, and when might it happen?
To attempt an answer to this intriguing question, look a little deeper at the attraction of the Internet stocks. Most of the hugely valued Internet stocks benefit directly and from e-Commerce, either so-called e-tailing or advertising. For example, Amazon mostly is in e-tailing while Yahoo mostly is in advertising.
But e-Commerce is but a small part of the potential for the Internet. As other, even more attractive uses of the Internet emerge, stocks engaged in those activities can be expected to explode in price, probably even faster than the current batch of Internet stocks. The reason is the market will remember how quickly the current stocks gained value, and will quickly discount expected explosive growth in pricing any new Internet theme.
While I don't claim to know all the Internet themes that will emerge in the near term, I know one that should begin to be noticed by the market in 1999. Internet Appliances. These devices attach to the internet and do smart things with straight-forward user interfaces, or no user-interface at all. As Peter reiterated in his recent Post 3824, three million Internet Appliances hit the market in 1998; six million should be produced in 1999; and about the same number as PCs in 2002. While PCs will continue to be measured in the ten's and hundred's of million, within ten years Internet Appliances will be measured in billions. These aren't my projections; this is what pundits now are saying in the New York Times, the Wall Street Journal, the IBD and the Washington Post among others.
Long-term readers of this thread will recognize Internet Appliances as the convergence of ubiquitous computing and ubiquitous communications, the next wave of computing and the underlying theme of this thread. In short, Internet Appliances comprise a soon-to-be common form of embedded systems. During the last couple of years, WIND started calling these devices Embedded Internet Devices, but the name that will be recognized by the market seems to be Internet Appliance. (Real long-term readers of this thread may remember posts about my trying to invent a more descriptive appellation than Embedded Systems, without success. Since that was before the Internet became dominant, Internet Appliance was not even a consideration.)
I think the time is right to begin identifying pure Internet Appliance plays, and to time investments in such companies. A pure Internet Appliance play is a company that is 100% dependent on Internet Appliances, such as NCI. When and if NCI is spun off from Oracle and taken public, it should be a huge market success. But many other established companies will benefit from the looming Internet Appliance mania in the market, somewhat in proportion to the extent their revenue is tied directly Internet Appliances. In this regard, Oracle itself benefits from server-side database processing; Sun benefits from its embedded systems thrusts, particularly in the application of Java-enabled devices, as well as with backend servers. HP will be a significant beneficiary. Even Intel will benefit beyond PCs and servers, since it must and will continue to compete in the embedded processor domain. Broadcom.com makes silicon for use in set-top boxes and cable modems and already has benefited unbelievably as a pure Internet Appliance play, presumably as a follow-on to Cisco's announcement that they intend to enter the broadband cable modem business.
WIND will be a major beneficiary of Internet Appliances. Like Broadcom.com, WIND is a common component running on most cable modems; about half of the xDSL modems; a significant portion of set-top boxes (through NCI among others). WIND is dominant in network printers, internet faxes (the new HP 9100C machine announced recently). There are probably at least a thousand different Internet Appliances on the drawing boards containing VxWorks, of which any one could cause the market to notice and appreciate WIND.
When a major analyst points out what we know on this thread -- just about cable modem and set-top box Internet Appliances – and WIND stock price will double in a week. Add to that what we know about digital cameras and imaging devices (which also are converging to become Internet Appliances) and the stock will double again. Add to that what we know about automobile Internet Appliances, not to mention automobile controls, CAN, OSEK, etc., and the stock will double again. (Speaking of automobiles, did you ever wonder why WIND helps sponsor a racing car in Europe?) Add to that what we know about the coming explosion of Internet Appliance-like devices in military systems, and WIND's military dominance, and the stock doubles again. Add to that what we know about smart wireless applications (called Internet Appliances) and the stock doubles again. Finally, add to that all the Internet Appliances about which we don't know anything, and the stock really starts to take off.
Two years ago anyone making these claims would be considered a lunatic. After witnessing the market's Internet Stock mania, particularly its recent excitement about Broadcom.com, these guesses are not only believable, but rather routine -- once a major analyst makes the connection.
But even if a major never makes these obvious connections, WIND should continue its 40% plus EPS growth for the foreseeable future. Regardless of the current or future preferences of the market, this kind of performance will be richly rewarded. It is an economic certainty.
Allen
PS WIND's Embedded Internet toolset probably should be renamed the Internet Appliance toolset. |
