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

To: Seldom_Blue who wrote (36828)	12/20/2000 1:35:13 AM
From: Mike Buckley	Read Replies (2) \| Respond to of 54805

Seldom, I was not trying to avoid doing my homework. I can understand that asking a generic question like that (from a mostly lurker) can seem that way. Though you're mostly a lurker, I remember the tone of your posts enough to immediately recognize that you weren't trying to avoid anything. That's why I felt it was reasonable to pick your post as the first to practice my New Year's resolution. Thanks for being so understanding about that. I wanted to mention that before responding to the rest of your post. Now I'm gonna read it! :) --Mike Buckley

To: Seldom_Blue who wrote (36828)	12/20/2000 2:17:52 AM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

Seldom, I don't subscribe to the method you use to determine the PE or the method you use as a basis of comparison, but because it's clear that you know what you're doing and why you're doing it I won't waste your time debating it with you. I will mention though, for the benefit of others who don't understand this stuff as much as you do, that comparing a stock PE with a mortgage can be misleading because even if your stock's PE is lower than your mortgage rate, the stock could still be horribly overvalued. Just how high is high? It was about twice as high a month or so ago. Maybe that's how high high is. :) For me, the best measurement of "too high" is when it seems unreasonable that a stock might provide the returns over a five- or ten-year period that I want. I generally look for atleast a 20% average annual return. I'll make a range of assumptions about what the revenue might be in five or ten years. (In Siebel's case, I wrote a piece awhile back explaining why $15 billion in sales, if I remember the number correctly, isn't unreasonable.) I apply a range of PSRs to determine a range of reasonable stock prices if that happens. I also determine the net profit assuming the range of revenue and apply a range of PE multiples to that. If after running all those scenarios it looks as if the stock has little opportunity to increase more than 5 to 10% annually over a long period of time, the stock price is too high for me. I should mention that the above calculations become a lot more important in determining an entry price than determining when to sell a stock. Since I did not know where he got these numbers [40% annual growth and 15% sequential growth] I don't know where he got them either. I'd have to review notes about the conference calls and stuff in the SEC filings to determine if there is any validity. (I'd like to assume that Siebel is complying with the new full-disclosure ruling and isn't giving analysts information not readily available at the same time to individual investors.) It's pretty difficult for me to assume a 15% sequential rate can happen at the same time as a 40% annual increase, but it is mathematically possible. More important for me is that I really don't care if his numbers are accurate. That's because the two most important numbers for me are the rate of growth in licensing revenue and the rate of growth of each of the two tornados simultaneously in progress -- the top-tier licensing and the mid-tier licensing. The analyst didn't address either so I paid no attention to his analysis. It's just my way of looking at stuff because I believe in GGaming. But in large organizations, unless it is previous budgeted, such large expenditure will usually get delayed and delayed. I think that was true with manufacturing-based companies and all companies characterized by Tom Siebel as capacity-driven companies (if I remember his term accurately.) A capacity-driven company makes spending decisions based on the company's capacity to build product and the extent to which capacity does or doesn't outpace demand for the product. Because of the number of channels today's customer increasingly demands of its vendors, companies are making those spending decisions more and more based on customer-driven factors. The world economy is every company's market now due to the impact and efficiency of the Internet. Because the number of customers available to a company is increasing exponentially and because each customer can demand that its vendor respond to its needs typically over six channels (telephone, e-mail, voice mail, fax, desktop and mobile computing), multiply the number of exponentially increasing customers by a factor of six and you've got a wildly increasing opportunity for a given company. That opportunity is being recognized by companies more and more, justifying more easily that money be spent that wasn't budgeted. You are also assuming that the CEOs of these companies are thinking long term business viability instead of immediate results. I think the investment climate these days does not reward managers who do not perform short term. Because Siebel's product typically has a ten-month payback, that makes the unbudgeted money even easier to justify. My opinion is that I am afraid the slowdown in the US economy (perhaps a recession) will affect SEBL's business more than the past will indicate. If I understand you correctly, I totally agree. That's because Siebel has never operated during a recession. The last one occurred before the company was formed. It also occured before widespread use of the Internet came into being, so there are a lot of unknowns about the impact of the next recession. If we discount(using whatever method we individually see fit) the slowdown, will SEBL still be a good buy today? I am not doubting the LTB&H strategy. I am merely trying to decide if I should still wait on the sideline a bit longer. Using Mike's guideline, I will answer my own question first. I think I will wait a bit longer to see the effect of the economic slowdown. I believe that's a reasonable approach. There is always risk in investing now or waiting until later to invest. If you're not comfortable investing now for any reason whatsoever, later is always better. Thanks for making my first practice session so enjoyable! --Mike Buckley