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To: Pirah Naman who wrote (23880)	4/30/2000 6:23:00 PM
From: Grantcw	Read Replies (1) \| Respond to of 54805

Pirah, I realize that semiconductor companies, CREE included, must make sizable investments in foundries to grow. These capital expenditures negatively impact cash flow. My question to you is, how do you factor in the fact that CREE floated a sizable secondary offering earlier this year that seems like it would cover a good amount of future capital expenditures. It seems that your valuation model would not take these financing activites into account, but I'm sure that you would agree that this secondary offering has some bearing on the valuation of CREE. I'm just wondering how you factor in financing activities into your equation. Would the amount of dilution of the offering affect your calculations at all? Thanks, cw

To: Pirah Naman who wrote (23880)	5/3/2000 11:43:00 AM
From: Pirah Naman	Read Replies (1) \| Respond to of 54805

Negative Free Cash Flow I've received some PMs from people who felt concern about my choice of CREE as an example of a company with negative free cash flow. In case others who did not write me felt similar concerns, here is what I have been telling people: 1) CREE was simply useful for my first post on this subject because it has been reporting earnings while having negative free cash flow. If you check that post, you will see it was just for illustration. There are other companies on the W&W list I could have picked as negative free cash flow, but they are not reporting profits, so they weren't as useful for illustrating a point. 2) With free cash flow analysis, you do not attempt to value CREE, or any other company, based on historical performance. You must make a set of assumptions about the future in order to reach a valuation. I was told that some people have been concerned about CREE as a result of it being used as an example. It is only appropriate that somebody interested in CREE dig in and understand their business dynamics. It is all too easy for some people to decide they like the stock and then choose whatever valuation justifies its ownership. The truth is, if you owned the entire company as a private entity, you would not have shown a profit yet, it would have been a cash drain. That can be part of rapidly growing a business, but that does not mean it can safely be ignored. It was suggested to me that I must have missed out on a lot of early growth opportunities in the internet and hi-tech sector by not buying companies with negative FCF. I did - but so what? I don't need to get in on every opportunity to handily beat the market. There has been no shortage of great fast growing companies that were FCF positive, and that is true today. And in missing out on some profitable trades, I also missed out on a lot of losing opportunities. - Pirah