To: t2 who wrote (10236 ) 5/12/2000 3:20:00 PM From: Ben Wa Respond to
A clear concern for anyone investing in "this type" of stock, meaning bellweather, high p/e is whether the p/e can expand beyond the current point on forward eps estimates. The "size" effect of a reduction in eps gwth took a long time to hit MSFT, but it has hit. (Let's ignore the other MSFT issues). Severe danger exists when a high multiple stock experiences an unexpected slowdown in eps growth. At that point, estimates get cut plus the P/E on those estimates get decimated. With the March quarter, JDSU surprised on the upside by a little bit, which means the street is very close to matching the company's performance in terms of JDSU not beating expectations. THAT is getting close to an inflection point. My guess is that Tony Muller's saying to look for 20% revenue growth sequentially in the June quarter will be exceeded, but the important thing to ponder is what would happen if it were NOT exceeded. At that point, you do not want to own the stock. I have also started to think about double ordering more in the optical space, and the risk this poses as capacity (fixed costs) come online. Once these fixed costs are up and running, they are there for good. Timing when supply begins to catch up with true demand, whatever that is, will be tricky. A last issue is the accounting thing - one of the problems that high flying stocks got into late last year and early this year was that people could not justify valuation on P/E, so they threw that out and used market cap vs. revenues - how Van Casper came up with nutty price targets for MRVC. The same thing applies to cash earnings, in ignoring the goodwill charges. If as an investor, you ignore goodwill, you essentially state that for the acquiroring company, it does not matter if they paid $1 million over book value for the thing they bought, or $1 trillion dollars. To somebody running a real business, they do care about the price of acquisitions. In many areas of techland, unrealistic prices have been paid for acquisitions because they have been paid for with stock. And, for some sellside analysts, an acquistion paid for in overvalued stock translates into true economic value. Example, take The Globe.COM - a POS that used to be hot. Assume mgt of Globe knew their firm was a POS, but their stock was in the ozone. Why not buy something of true economic value with that funnymoney? They may know that acquis target X is worth $5 million, but who cares if they pay $20 million in Globe stock for it? a very interesting world we live in.
