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

To: hueyone who wrote (43775)	6/21/2001 8:19:21 PM
From: Mike Buckley	Respond to of 54805

Huey, Thanks for taking the time to reiterate your thinking. Now I understand your perspective. I hope I'm not wrong in having a different perspective, but I certainly do understand your concern in that light. --Mike Buckley

To: hueyone who wrote (43775)	6/21/2001 11:58:17 PM
From: Seeker of Truth	Read Replies (2) \| Respond to of 54805

Hueyone, I just disagree with one of your points. If SEBL can't reward its employees with stock options that are worth anything then neither can the other IT companies so where can these bright people go? Nowhere, so they'll just stay put . As for your proof that SEBL wasn't getting a net positive cash flow without stock option related cash receipts, let me at least temporarily completely accept that(until and unless some very experienced accountant shows any flaw in your argument, which I certainly can't see now). So SEBL doesn't now make profits. I consider SEBL moderately overpriced now; I said my metrics recommended selling at 42-43. But there is a strong bullish case to be made also. Let me make it. They are the acknowledged leader in their field. They simply have by far the best software. Having built the best, sooner or later they can charge a fancy price for it. The best is worth more. As far as losing money in the beginning or only breaking even after several years, that goes with the territory. It isn't cheap to get the programming just right. It isn't easy to know the customer's requirements in great detail and amaze them with your program that satisfies their detailed requirements and then some. Being the leader in its field, the gorilla, SEBL will attract other good but smaller companies in related fields to merge with it, increasing its power. I think it's not unreasonable to think that they can after not too long a while make 10% profit on sales. At the end of March there were 453 million shares outstanding. Assuming two billion sales, they actually had 588 million sales in the first quarter, we get a potential 44 cents profit. Let's suppose that the profits per share grow by 25% a year for the next decade. That also seems reasonable. CISCO, DELL, INTC, all did even better than this. Worldwide, the CRM area will be very important for all mid size and large corporations. This gives us about $4 per share of profits ten years hence. Suppose the shares sell for 40 times earnings then. That gives us a price then of 160. How sure are we then of achieving this near quadrupling of price in ten years, i.e. 15% per annum? Not 100% sure? Then we should seek a, let's say, five fold growth of our investment. That means we wait for a price of about 32. Usually I like to compare the P/E with that of money but you indicate that E is zero, so we can't do that meaningfully. In the software business you lose money on the first thousands of copies or the first few hundred systems you sell, Finally, when the development expenses subside the money really rolls in because there are few costs associated with the sale. The buyer has friends who use the program or system; there is momentum. My 10% on sales is really conservative. I'd like to emphasize that my evaluation system has not been tested. It arose out of the flames which burned people like me who thought the hypergrowth was permanent.

To: hueyone who wrote (43775)	6/22/2001 12:08:22 AM
From: Pirah Naman	Read Replies (3) \| Respond to of 54805

Huey: Here's another way of looking at it. Kind of silly maybe, but...I'm going to make up a term for this - net cash flows - as what I will be discussing is not exactly the FCF we all know and cherish. We can take any company which has multiple sources of net cash flows and estimate a value for those net cash flows. Perhaps a software company has product sales and services. These two lines of business have different cost structures, growth rates, and so on. We could ignore synergies and determine a value of reach line of business, and sum them up to get a total value. If we accept this line of thought, then we could consider the employee options and stock programs to be yet another "line of business." While that might seem to be separating things out too much, these "operations" do get their own lines on the statement of cash flows. So we could estimate the value of these net cash flows. The problem, however, is that the magnitudes of these cash flows are dependent upon the pricing of the stock. In other words, the value becomes dependent upon the price . If nothing else, this illustrates the circular nature of the entire employee options game. - Pirah