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Technology Stocks : PMC-Sierra (PMCS) - moderated -- Ignore unavailable to you. Want to Upgrade?

To: SJS who wrote (53)	10/14/2000 11:36:59 AM
From: Trader Dave	Read Replies (2) \| Respond to of 469

Price targets the methods are as arbitrary and variable as the quality of the analyst. Some use a price target by saying.... company xyz should sell at a x price to sales ratio, so if 2001 revenues are Y, the stock should sell at x times y in a such and such a time frame. or they use forward sales and set the 2001 price target based on 2002 revenues. analysts are using price to sales ratios much more since the math on pe ratios is practically absurd. however price to sales ratios are really a proxy for price to earnings and must be vary carefully considered. amcc and pmcs deserve wildly different price to sales ratios than many other companies due to their extremely high sustainable operating margins. In other sectors price to sales ratios may have validity if a company is investing heavily or changing its business model.... I know of several software companies developing major subscription business models that have moderately low operating margins, but once the transition occurs, they could see sustainable operating margins in the 35% range. The PE's are not even printable, but on a price to sales basis the companies are almost attractive based on what they will likely become. Some analysts with less experience in the investment world than you have set price targets using relative valuation, often going so far as using relative valuation in completely unrelated companies.... the used yugo is worth $50,000 since the mercedes is $250,000.... these methods are almost negligent in my view. Often a price target contains the method used to construct it, if it doesn't make rational economic sense, you should write off everything that analyst has to say. BTW, if I'm not mistaken, AMCC has a $325 price target from Alex Guana of BofA securities, so there are comparable targets to pmcs. The most significant challenge I am dealing with is setting proper valuation parameters for companies like these. The sustainable growth rates these companies are displaying could warrant unforeseen valuations. Mathematically, a high PE to growth rate valuation is much more justified with super high earnings growth depending on the sustainability of those growth rates. If PMCS and AMCC can grow at rates north of 80% for more than a few years, they may be really cheap stocks, even compared to "value" stocks in the old economy. However, if AMCC or PMCS (or juniper or sycamore or broadcom etc etc etc) start to slow in a shorter time horizon, they're over priced by 50% or more. therefore, many of these stocks are either wildly overpriced or the cheapest most bargain basement investments you could imagine. It's hard to know which. the wild volatility will continue for a long time. All I am sure of, it is most unlikely these stocks are fairly priced. TD