>A lot of the other tech companies have recovered most of the share price
>drop(on Monday). WIND doesn't seem to be doing so.
Actually, it seems to me that WIND has been holding up very well under trying circumstances. WIND is conspicuous as a high P/E tech stock often associated, wrongly, with semiconductor stocks. On Tuesday, it fell badly at the start on low volume, then rocketed up 10 points before profit taking took all but a point for the day. On Wednesday, it held much better than most tech stocks.
>Is this ($36) what the market feels the price ought to be.
It may appear that the market is trying to price WIND at $36, but that is an illusion. The fact is the market is much more confused about what level to price WIND than we are. Imagine the difficulty. On one hand, WIND is a high tech company with a high trailing P/E ratio, often confused with semiconductor companies. On this basis the market would like nothing more than to sell it off and take profits.
On the other hand, WIND management has provided credible visibility for future earnings. Further, impressive earnings growth should be intact for years and years - again made all the more credible by accelerating I2O growth, an EID explosion, the coming NC, Tornado for DSP - both a whole new market and yet another way to cement dominance over the traditional microprocessor market - and cozy relationships developing between WIND and Intel, Motorola, HP, Oracle, and Adobe, not to mention all the design wins with telcoms and networking companies, and near dominance in rapidly growing military/aerospace applications. Finally, WIND is one the very few companies poised to do as well or better if the Asian crisis gains currency (i.e. loses currency, pun intended) than it would have done normally.
The market knows all this, and therefore it knows that WIND will be increasing EPS in the range of 50% or more well into the next century, no matter what happens to the world economy: deflation, inflation or recession. As a financial market, the market knows that at this rate WIND's trailing P/E will be 1/5 the current P/E within four years, or 12 (measured from three weeks from now when WIND reports $.18). The market knows it will reward that kind of performance then with a P/E at least equal to 50, or 4 times the current price. Even being as stingy as possible, it would have to at least give WIND a P/E of 24, which would translate to a doubling within four years, or a 15% annualized compound return.
The market does not give away nearly risk-free 15% returns. Especially the market does not give away 15% returns with certainty, while also giving a reasonable expectation of making 40% or 50% annually, or even more. The primary reason-to-be for the financial market is to plug these kinds of holes, thereby allocating capital efficiently. Of course the only way to plug this one is by raising WIND's stock price.
So, instead of feeling frustrated with the market for its periodic shortsightedness, you might show sympathy for a not-too-bright market being caught between two colossal countervailing forces. James Carville once said if he is re-incarnated, he wanted to come back as the bond market, because it intimidates governments more powerfully than any political force. I suspect that he purposely avoided wanting to be the stock market for fear of being squeezed between unrelenting forces associated with emerging powerhouses like WIND.
What would you do if you were the market? Your instinct might be to sell it off now to satisfy the anti-tech, anti-high P/E forces, then hurriedly push the price way up to prevent arbitrage (i.e. buying a sure winner cheap). The problem is that you have to somehow inhibit long-term investors from buying the stock at dips, to avoid giving them excessive profits which is abhorrent to any self-respecting market.
It turns out that the best way to inhibit long-term investors is to obfuscate. Confuse everyone. Cloud things up. That is, become volatile. If you are lucky, the anti-high tech, anti-high P/E crowd will have plenty of opportunity to sell without instantly being proven stupid (because the price will be going down as well as up), while normally cogent long-term investors will hesitate to climb on board and take advantage of the give-away. For example, last Tuesday you might have shot down to $30 near the opening, only to shoot back up over $40 and then close up only $1. Nobody will figure that out! In short order, the stock will wend it way back up, but by traders, not investors, and you don't have to worry about traders making excess profits. Since nobody will notice the temporary inefficiency [except for the WIND thread on SI -- but despite what Ramsey says, you (the market) can choose to ignore the thread], you might be able to trick students of the market into believing that you are efficient. Of course they will smell something fishy, and invent terminology like "weakly efficient" to explain away inconsistencies, but what better way to fuel endless Ph.D. dissertations, another responsibility shared by all financial markets?
If you were really smart and courageous, you might let traders elevate the price toward the intrinsic value (which I assume you know) and be done with it. You do it with Coke, Gillette and other large Caps, but you lack the guts to do it WIND. Is that just because neither Peter Lynch nor Warren Buffett invest in high tech stocks? Is it really better to own Dairy Queen rather than Wind River?
I know all this sounds silly, but there is no rational explanation for recent market behavior, nor is the market leaning toward any particular price for WIND at the moment. The market is caught between the rock and the hard place, and is simply trying to obfuscate.
Allen |
