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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: tekboy who wrote (9931)	11/8/1999 5:39:00 AM
From: Bruce Brown	Read Replies (1) \| Respond to of 54805

Tekboy, Last week was one heck of a powerful week to be conducting any kind of a test. ;-) As we sat and watched some of our favorites climb and climb and climb this week, I thought I would share this post from the list serve as we were having a discussion over there in regards to PE's and the Gorilla Game/Tornado Game. Most of this we know, but I thought it might be of interest to read the following post. I'm still not sure of protocol of using somebody else's post and showing it to others, but I will take the heat. ----------- Subject: Price Earnings ratios From: "Geoffrey Moore" Date: Sun, 7 Nov 1999 13:00:43 -0800 Gang, In recent postings I have seen a fair amount of discussion of P/E ratios. I have to say that for high-tech in hypergrowth markets, these things are toxic. It is like measuring the progress of a kindergartener using the Kuder Job preference test. In other words, it is a TOTALLY inappropriate tool, -- even when it works! The basic premise about GG investing is to keep the focus on competitive advantage. The highest form of competitive advantage comes from riding the next technology wave and letting it carry you as far up the beach as it can. Once you have gotten there -- once you have acquired, in other words, the lion's share of the customers you will ever acquire -- then you want to turn your attention to serving them. That is when P/E ratios make sense -- as a measure of how well you can serve (and protect) your installed base. But prior to that time, what matters is how much market share you can acquire in competition with others also trying to ride the wave. Here earnings are if anything a liability, because what they say is that although you had additioal resource to throw at the problem of acquiring still more customers, you could not spend it in time. That is a bad thing, not a good thing, because tornadoes represent the one time that the world is "up for grabs." Price/Sales ratios are a better indicator for this time, although by no means a perfect one. Revenues, that is, track better to new customer acquisition success than earnings. But you have to "look through" the revenues to make sure they reflect that phenomenon and not something else. Hope all this helps, Geoff Geoffrey Moore Chairman, The Chasm Group Venture Partner, Mohr Davidow Ventures ------------- The portion I selected in bold could be used to enter into a discussion of where some of our old friends and new friends in the Gorilla Game and Royalty Game are at the moment and what their P/E's reflect. For instance, Prince Dell has a foot in both entering the service of customers in terms of the technology adoption life cycle, yet they are still trying to acquire a larger lion's share of customers that they will serve going forward with the new Brazil plant, overseas plants and Tennessee plant. Hence, their P/E is much more of a factor now that serving the customer is such a large portion of their focus, yet the acquiring of customers is far from over for them (despite the current event cheerleading status that anything running MSFT products will be quickly switched our for AOL, SUNW, AAPL and Linux products). King JDSU is certainly in the fiber optic wave of technology and letting that wave carry it as far up on the beach as possible. Certainly, they are not at the point where turning to serving the customer is a factor and the P/E reflects that quite well. Qualcomm is, of course, the wave of CDMA and is riding the entire wave of wireless. We are all well aware that in terms of surfing, this is a serious hang ten wave that is carrying absolutely anything to do with wireless at the moment. All the value chain Royalty plays in the sector are hanging ten as well. P/E's reflect the moves in the sector as they should for the time being. In other words - toxic. I would include Siebel and the wave of the front office game as being in the portion of the life cycle that has not yet turned to serving the customer as the major portion of its focus. In other words, in the bell curve of the technology adoption life cycle, the climb up the left side of the bell is where they are still firmly located. The JD Edwards first phase of integration with Siebel's is now complete - yahoo.cnet.com . The post I made a few days ago which stated 66 percent of IBM's customers wanted CRM products which will be available via the IBM/Siebel alliance certainly leads me to believe that not all pragmatists have yet purchased. So, in terms of the bell curve of the technology adoption life cycle we could make a strong case for Siebel's high P/E when coupled with their emerging domination and the CRM tornado for now. It's more difficult for me to make a case for Microsoft, Cisco and Intel at the moment because of transitions going on for all three and the tornado S curves they have been able to ride so well to keep the growth 'alive' for lack of a better word. I'm wondering what we are going to end up with these three over the next 10 to 15 years (regardless of the DOJ results)? The next three GE's or something less compelling. Any thoughts? The natural retracement that follows such a solid move up in the previous six trading days looks to be fueled with the Microsoft scape goat. Futures overnight here in Europe are trading down 15 points. BB