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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (53318)	5/22/2001 10:20:21 PM
From: RetiredNow	Read Replies (2) \| Respond to of 77400

Well, there's one. GE had net margins of 9.8% on revs of $130B.

To: Wyätt Gwyön who wrote (53318)	5/23/2001 2:13:36 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

mm: re 15% margins sustainable at 182 B$ I think you are right. Heck, they're barely sustainable at 20 B$, but who's counting. Let's start by agreeing on one thing at a time though. Right now I'd like to see if we can forge a common consensus on a forward revenue stream. Then we can develop cash flow models and start to iterate a value model. Cisco is extremely difficult to model from a business perspective because of the effect of stock price on the stock price. This begs an explanation. Forget PE, Stock price depends on fairly sophisticated models of cash flow. Sadly, Cisco's Cash flow is very positively affected by stock price. Or, by the difference between current share price and share price 3 years ago. This has two components: (a) option strike price = cash infusion on exercise, and (b) tax benefit on difference between exercise price and strike price. Process flow engineers will very quickly recognize a positive feedback loop. The higher the current stock price, the higher the cash flow, thus the higher the current stock price. This works in reverse too, except that option exercise patterns change so it is really a nonlinear equation. Which makes the model extremely difficult to develop. But one thing people should note is that when they buy a share of cisco, a fraction of that money goes to the stream of cash flow they thought they were buying. In a very kind of leveraged kind of pyramid kind of way. I have a dollar in my hand plus a Price:Book ratio of 2. Which gives my hand a share value of $2. If you give me $2 then the two of us will each have half of something worth $6 by my simple P:B valuation metric. My net worth has gone from $1 to $3, yours from $2 to $3. Not bad. You get a 50% return on investment just for joining me. Together we go raise another $6 and each of us has something worth a third of $12. Not bad, you just doubled your money and our friend took 50% gain too. And so off, down the yellow brick road... And so on. When the price gets to $82, the last one out the door loses. If we are smart about it, it's us, and the last one out is (coincidentally) the last one in! My profits are obscene, yours slightly less so, the next guys less so... and the last guy in pays for all of us. Not bad. Then, having paid his tuition, our nice last guy starts over again when those of little faith have departed. Anyone who has ever been involved even remotely with the process of raising equity capital will recognize the elegant dance above, and understand where the terms "dumb money" and "smart money" are properly applied. John