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

To: Mike Buckley who wrote (48068)	10/18/2001 2:37:25 PM
From: Thomas Mercer-Hursh	Read Replies (2) \| Respond to of 54805

To the people who don't believe valuation can be helpful ... It seems to me that one of the problems with valuing gorillas ... other than this small matter of finding the best instrument, which we have been entertaining ourselves with ... lies in their stage of development. Any company will have intangible assets which do not show in the financials -- brand recognition, especially good engineering talent, IP, whatever. For a mature company, one tends to assume that the value of yesterday's intangibles is reflected in today's earnings and that growth in the value of the intangibles more or less coincides with the growth of the company. In such a situation, one can more or less ignore the intangibles in comparative valuation. With an on-going company that has recently acquired some new IP giving them a boost in their intangibles, one can more or less adequately compensate by "stretching" the computed value to recognize the potential of this new IP. But, consider the young gorilla. Here we have a company with limited and modest history and intangible assets which we expect to deliver dramatically increased earning potential (the tornado) and for an extended period, beyond that which we would expect from ordinary IP. If we are pre-tornado, the value may be reflected in earnings hardly at all. I we are in early stage tornado, then it may be reflected in recent rapid growth, but guessing the rate of that growth and its length is extremely difficult since the curve has only just started. And, even if we are mid-tornado, we have the difficulty of assessing whether this is a one tornado gorilla or whether the company will use its position and skill to launch subsequent tornados. This certainly complicates the valuation problem.