Microsoft is not a comparable.
Big stocks are in a completely separate market. A small company with the financial record of Microsoft would never receive a P/E of 62. A long term investor would be better off in small stocks.
The growth rate is slowing down, according to EE Times (who interviewed the company) at eet.com.
Even so, Wind River said it hopes to grow its staff of 380-odd by between 25 percent and 30 percent this year, and perhaps by as much as 40 percent in 2000.
The company has historically grown proportionally to the increase in head count, so my 30% estimate might be overoptimistic. The CEO warned in the conference call that it's going to be harder to grow the company as fast as when it was smaller, and Laurie Harper, the company's staffing manager tells why:
"There's still a lot of market share to be had," Harper said, but added, "It's going to be harder to find people with embedded skills — I think the market's growing faster than people are being educated in it."
The same dynamic is at work in the ERP software industry. Those companies had hypergrowth for 4 years, but nobody wants to pay $200/hour for programmers. SAP, Oracle, PeopleSoft, and Cambridge Technology Partners (ERP consulting) have dropped 40-80% from their highs of last year.
You said:
The Street would go nuts for any company that can sustain growth above 20%. The problem is that lots of companies are "expected" to grow rapidly, and many do for short periods, but few, very few, can sustain high growth. The frequent disappointing actual performance causes the Street to discount legitimate estimates much more than justified economically.
I don't think the Street can differentiate between a long term winner and a flash in the pan, either. That's why you ought to expect the P/E to roughly equal the growth rate for small stocks, even though the PEG is an imperfect valuation tool. Wind River barely broke even in 1994 and earned a small profit in 1993 and 1995, so it fits into the flash in the pan category, like the ERP stocks.
I don't think you can tell the difference, either. You invested in Wind River, Qualcomm, and SystemSoft 2 years ago. Qualcomm has doubled, Wind River has broken even, and SystemSoft went bankrupt. An investor following your advice would be in the same place he was 2 years ago.
Don't feel bad, though. I can't differentiate between a long term winner and a flash in the pan, either. We're only human! |
