Hi Malcolm,
Analysts' predictions of EPS and growth rates certainly have some value, but their value is greatest in companies whose growth tends to be linear. The more growth deviates from linearity, the less relevance analysts' predictions seem to have.
There are many cases in point, two of which you mention. CSCO has met or beaten analysts' earnings estimates for all 39 quarters it has been publicly traded. It is no coincidence that CSCO is up 21-fold over the last five years.
QCOM has, it seems, perfected the art of making a mockery of analysts' estimates. When I first bought QCOM at $107, the rap was that the company had gotten way ahead of itself, with a PE of about 250 as I recall----"way overvalued." When I bought more QCOM at $192 about 3 months later, the rap again was that the company had gotten way ahead of itself, with about the same PE of about 250----"way overvalued," people again said, as did analysts, as did columnists, as did the thread buzz. Now, QCOM has been knocking at the door of $400 heading into a split, and the rap is, once again, that the company has gotten ahead of itself, and is overvalued.
The problem, as I see it, is that traditional valuation measures----which I pay close attention to in other instances----just don't seem to predict how the market will value a company whose earnings growth is neither linear nor predictable. And so it goes......
MLNM has a business model and managment style which is very remniscent of QCOM. Also, the way they position themselves to enter rapidly expanding (and thus, less predictable) markets---and to create such markets---is also similar to QCOM. In my view, MLNM has spent the last year or so positioning itself to very suddenly enter huge markets which are, at the moment, completely missed on the balance sheets, and in fact don't even exist yet. And when this happens, MLNM will dominate these markets, in some cases. And earnings and MLNM stock price will undergo QCOM-oidal increases. Although this may be somewhat typical of biotechs because of the way their products enter the market, I think MLNM will prove to be a dramatic example of this within the next year or so. The reason is because much of this growth will not come from MLNM products per se, but rather from products which others are developing, using IP licensed from MLNM, and on which MLNM will receive royalties as long as these products of other companies are being sold. QCOM receives $0.14 for each CDMA-based handset sold, regardless of who manufactures, markets, and sells it........
In the case of MLNM, what this does is to create the conditions under which analysts' predictions of earnings will tend to consistently underestimate actual earnings, and there will be upside earnings "surprises." This has been QCOM's course, and I think it will also be MLNM's. And, the market will certainly react, and people will continue to think the company is overvalued.
My major point, really, is not to convince anybody to go out and buy AMGN, or HGSI, or MLNM. Rather, when doing DD and evaluating any company, consider the possibility that the evaluative methods may not be as relevant as you might imagine. To the extent that this may be true, then decisions ought to be based upon other factors. A careful consideration of the dynamics of the company's present market---and potential future, even yet uncreated markets (particularly worth consideration in the case of MLNM)----becomes increasing crucial.
As always, JMVHO.
Regards,
Walkingshadow |
