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Technology Stocks : Wind River going up, up, up!
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To: Erwin Sanders who wrote (4867)4/14/1999 6:35:00 AM
From: Mark Brophy  Read Replies (2) of 10309
 
Tornado for Managed Switches is essential.

There's no way this company can grow at a 26% annual rate for the next 5 years unless they identify and conquer new vertical markets. The company has done all it can with an RTOS carrying a $1.50 royalty. Adding additional value to each shipped product is an excellent business strategy.

I think there are a couple of reasons why the PEG is a more widely used measure of value than calculating a series of cash flows. First, a cash flow analysis has a high sensitivity to the variables of short and long term growth rate, as well as number of years to project. By reducing youe estimate of short term growth rate from 40% to 26%, you've reduced the fair value from 61 to 37. That's quite a difference with only 2 months of new fundamental business info! And you could calculate similar wild fluctuations by changing your long term growth rate from 20% to 10% or 25%, or by changing the projection time from 15 years to 10 or 20. Second, analysts are lazy and the PEG is much easier to calculate. Third, the PEG better takes into account the possibility that earnings might be reduced, or growth might be reduced or completely disappear. TMS and/or I2O could be a failure, or ISI and Microsoft could cut off the possibility of identifying new vertical markets. Microsoft has 600 engineers working on WinCE and Wind River has only about 185 engineers, so don't dismiss them merely because they're not on the radar screen today. Sooner or later, they will matter.

It's not easy to grow a company 26% for 5 consecutive years. The exciting thing about this company is that it's a realistic possibility, but it's certainly not a safe investment.
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