To: Art Bechhoefer who wrote (6130 ) 6/23/1999 9:13:00 AM From: Wyätt Gwyön Read Replies (2) | Respond to
Good points, Art. Another thing to think about (and I don't have the answer or estimate yet), is the return on invested capital (ROIC) for SNDK. This is a metric that some have used to explain the high P/E's (price-to-earnings) and PBR's (price-to-book) seen by stocks such as DELL (before it went comatose, anyway). To take DELL as an example, its PBR is currently 33.88 according to Yahoo finance, while SNDK's is 5.60. Many skeptics like Jim Grant (of Grant's Interest Rate Observer) think DELL is absurdly overvalued based on its high PBR. But bulls counter that such arguments are myopic. Dell has an incredibly high return on invested capital (I forget the exact figure). This means that, for every dollar DELL actually puts into its business (as opposed to buying back shares or paying down interest) yields a very high return--much higher than any other box maker. The market's logic is that, if DELL can make so much money off each dollar invested, then it should have a much higher price for each dollar of sales or earnings than competitors that have ROICs half that of DELL's. (The same ROIC argument, in more general terms, is applied to the Internuts since they can supposedly make a ton of bucks without wasting capital on "bricks and mortar"; this, plus the anticipated explosive growth and early-leader advantage of companies like AMZN, along with a goodly dash of speculative madness, gives them their incredible market caps.) Going forward, as the financial picture for SNDK becomes clearer (with sales gains, etc.), we should be able to get a picture of what SNDK's ROIC will look like. To the extent that it makes a lot of money off little capital investment (through royalties, etc.), we can expect the market to reward the stock with a high P/E and high PBR. This is in stark contrast to a company like AMD, which has enormous capital costs that must be put up before it can make any money (which it's not doing too well at the moment).
