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Technology Stocks : Silicon Graphics, Inc. (SGI) -- Ignore unavailable to you. Want to Upgrade?

To: John M. Zulauf who wrote (3351)	10/31/1997 10:34:00 PM
From: Tim Mak	Read Replies (2) \| Respond to of 14451

Hi John: Your remarks on SGI's NT box suggest that buying SGI now is almost as good as making a one-sided bet. My reasoning is as follows, and I hope you will comment on its soundness. (1) Let's price SGI's assets, conservatively and in rough numbers: (a) Alias\|Wavefront, assume no increase in value since purchase, ... 500M (b) Cray, assume SGI overpaid, ... 500M (c) MIPS, 20M chips sold, at $10 a piece, and use a PSR = 1, ... 200M (d) Cash and equivalent, ... 500M Subtotal 1.7B At the current price, SGI's capialization is about 2.7B. That is to say, the OTHER ASSETS (O2, Origin, I/O & graphics technology, NT box, and other goodies)is priced at 1B. (2) Your remarks on the NT box suggest that it will be a very good box. Suppose it will kill Intergraph and take business from others. Since Intergraph has sales of 1.2B, it is not unreasonable to assume that SGI's NT box will generate revenue upwards of 1B. Assuming a PSR of 1, the NT box business may be priced at 1B. (3) Since Intel and Microsoft will pay for the development and rollout of the NT box, we are left with the conclusion that SGI's OTHER ASSETS, excluding the NT business, is priced at ZERO! (4) As to the future of SGI's sales, it is safe to assume that Cray will be okay if not good, the MIPS OEM sales will be fine, the NT box sale will be good. Then the only uncertainty is the sales of the unix boxes and the big servers. Consider two scenarios: (A)Going nowhere, pretty much like DEC. (B)The sales of NT boxes lead to mainstreaming of SGI's other boxes in enterprise computing. In the first pessimistic scenario, the SGI's stock would go nowhere. In the second rosy scenario, with growth rate of 20 to 30%, SGI's revenue could double in 3 years, and its PSR could go up from the current 0.7 to maybe 2.1. That is, the stock price would go up 6-fold. Of course, what is going to happen is likely to be somewhere in between. But since the bet cost nothing (the OTHER ASSETS being priced at ZERO), buying SGI now is almost a one-sided bet. (5) The uncertainty is whether the future will be closer to (A) or (B). The outcome seems to depend on (i)marketing and (ii) SGI's people. Consider marketing first. It is clear that the outcome of SGI's marketing efforts has not been very good. But there is hope:- Consider SGI's marketing efforts under the framework of Geoffrey Moore's book "Inside The Tornado" on marketing high tech. If one interprets SGI's sale effort into the Auto, Drugs, Telco, ISP industries as part of Moore's BOWLING ALLEY strategy, then one would see that with the help of the NT boxes SGI might just generate enough momentum to carry it across the CHASM and start a TORNADO of sales of power servers. [BTW, Moore's book jacket reveals that he had consulted for SGI. So presumably SGI's marketing is not ignorant of the technique of Bowling Alley marketing.]The question is: does SGI's marketing folks consciously know that they are in the Bowling Alley? ... John, can you shed some light on this point. (6) To cross the chasm to become a gorilla in the enterprise computing market obviously require leadership and a fighting spirit. At this point, there's no basis to predict what kind of leader will replace Ed. But it should be possible for an insider to gauge the morale of the troops. ... John, can you shed some light on this point. (7) Lastly, a personal remarks. I am a long term investor in SGI (by way of the Alias purchase)and looking to add to my position. As a long term investor, I am very appreciative of what Ed had done for the company. And if SGI can overcome its current difficulties, I suspect a good part of the credit have to go to the strength of the SGI people which Ed help cultivated. Therefore, I find some of the savage attack on Ed posted on this thread rather uncivil. I always think that if one trades and loses money, then one ought to have the decency to admit that one has failed as a trader, and not blame the loss on others. Again, thank you John in advance for your insight.