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Technology Stocks : INVX Innovex Comdex Winner !! -- Ignore unavailable to you. Want to Upgrade?

To: Mark Oliver who wrote (1812)	12/4/1997 10:42:00 PM
From: Mark Oliver	Read Replies (1) \| Respond to of 3029

FOOL ON THE HILL An Investment Opinion by Randy Befumo What's a Western Dig Investor to Do? Western Digital's (NYSE: WDC) (N) (S) decision to restructure announced on Monday was for many investors only the latest in a series of horrors heaped upon them in the past few weeks. The company will now not just shift away from thin-film inductive head drives, but it will reduce desktop drive output, end production of drives for notebook and laptop PCs, and accelerate even faster the transition to magneto-resistive (MR) head technology and enterprise-class disk drives. Industry-wide oversupply and irrational pricing have blown away an investment thesis that seemed inspired only three or four months ago. Whether or not an investment thesis remains in the tattered wreckage of Western Digital shares is the question that many investors are now asking. The relative stability the industry had enjoyed has now been completely devoured by market share hungry Korean and Japanese manufacturers. While Seagate (NYSE: SEG) (N) (S), Quantum (Nasdaq: QNTM) (N) (S), Western Digital and IBM (NYSE: IBM) (N) (S) still hold more than 80% of the market, Maxtor, Fujitsu and Samsung are aching to take share. Even with Singapore Technology's Micropolis unit shutting down operations forever, there is still much more production capacity than available market share, meaning there are more price cuts to come. While Western Digital's decision to focus on desktop and enterprise drives is perfectly rational, it is one of the few rational events going in an industry that has gone nonlinear. After three years of relatively stable pricing declines (per megabyte), all hell has broken lose. If history is any guide, this will not be fixed very quickly. Western Digital's situation appears to be similar to that of Micron Technology (NYSE: MU) (N) (S), which entered 1996 with an unprecedented three years of pricing stability in the memory market. Unfortunately for Micron, that pricing stability was destroyed when Korean and Japanese memory manufacturers initiated round after round of profit destroying price cuts. Although Micron's strategy was to be the low-cost producer in the trailing-edge technology as opposed to Western Digital's strategy of being the low-cost producer in the higher-margin areas of its business, the model still holds. Disk drives and DRAM are still very much commodity products, where there are more than enough producers of high-quality drives to make price, and not brand, a decisive factor in the buying decisions of OEM (original equipment manufacturer) customers like Dell Computer (Nasdaq: DELL) (N) (S). In retrospect, the mistake investors who were bullish on Western Digital in May and June (like myself) appear to have made is that they did not apply the pricing stability thesis as rigorously as it should have been applied. For Western Digital to continue to earn excess returns on capital, industry pricing had to stay rational. The first hint of pricing irrationality in late September should have inspired more than caution -- it should have violated the thesis. For Western Digital to earn excess returns there had to be absolutely zero tolerance for pricing irrationality. Once Seagate proved that there was oversupply in the channel and that pricing irrationality was the only response, investors should have recognized that the thesis no longer held and should have developed a new one -- or sold. For investors who had the tenacity to short the shares on expectations that pricing irrationality would eventually return, their thesis appears to be vindicated. Although certainly no one expected the Southeast Asian currency crisis, an exogenous event that would impact the market as a whole was long overdue. By playing the percentages, investors who were short Western Digital did quite well. Investors who appropriately assessed the risk levels and made sure to buy Digital or its storage brethren at ultra-cheap valuations given the inherent low-margin nature of the business have not been totally crushed, but investors who did not exercise valuation discipline have learned a painful additional lesson -- in the end, price matters a lot. Looking forward, investors will probably see Western Digital pushed to massive new lows in the coming three weeks due to tax loss selling. Individual investors were large holders of the shares and the degree of loss has made it an attractive tax loss selling candidate. If today's loss on no news is any indication, Western Digital will likely see $16 by the end of the year -- only to recover in early January. With Western Digital at 0.43 times trailing sales and sales potentially falling to around $3 billion in this fiscal year, the price/sales ratio low of the last three years of 0.24 has not even been hit. However, given that this is the counter-cyclical moment of maximum pessimism, if investors have decided to maintain their position despite the turmoil, they may want to indulge in a bit of creative tax accounting and sell to capture the tax loss and repurchase 30 days later.

To: Mark Oliver who wrote (1812)	12/5/1997 8:26:00 AM
From: mfamily	Respond to of 3029

Ok, here is my take on the situation. Innovex says 20-25%growth. Is that likely to be achieved? It seems to me that Innovex already knows that it will meet its objective for at least the first two quarters this year. Look at their 6/20/97 press release in which they had already indicated that they would have a great third quarter but 4th quarter would be below expenctations. Since they already knew by June what would happen in 4th quarter 97 (July-September) they must know now what second quarter 98 will look like (January-March). Further all the troubles going on with dd makers now appear to have been known to Innovex very early on (and that is clearly implied in the phone call that was posted in here a couple of weeks ago). This is logical because before these companies switched to MR technology they had to make sure they would be able to obtain the necessary components. So whatever the problems with disk drive makers I believe Innovex has factored that into its projections. I think I still disagree with you, Mark, about the number of platters that will be needed going forward. Again, this is based solely on my observations as to what is being sold in the market place right now. As I look at advertisements from dell, compaq and others clearly much larger hard drives are now standard. Yesterday I received a flyer from dell and 6.5 gigs was pretty much the standard hd. Compaq standards were 4.3+. Yes, the cheap PCs are still coming with 1.6+ but according to Innovex (again referring to the posted phone call) the under $1,000 pc is primarily new users who would not otherwise buy a computer or second computers for home; their conclusion is that this is increasing the overall market. I read this someplace else too; most people buying computers are still looking at the $2,000-2,500 range. Also consider that compaq believes it will reach 50 billion in sales by year 2000, that would mean an awfully lot of $799 computers. CONTINUED ON PAGE TWO

To: Mark Oliver who wrote (1812)	12/5/1997 8:50:00 AM
From: mfamily	Read Replies (2) \| Respond to of 3029

CONTINUATION PAGE TWO Furthermore consider the expansion that Innovex which went through: "We are currently shipping pre-production volumes of HIFs ahead of schedule and it appears that our customers are on schedule with their production ramps. We expect shipments to increase dramatically during the second half of fiscal 1998 and we need to have the capacity to produce a minimum of 2 million HIFs per week by January 1, 1998, 5 million per week by July 1, 1998 and 10 million per week by January 1, 1999," said Haley. This is from April release last year, but imagine going from 2 million per week to 10 million per week. What is a reasonble PE? I don't know, but putting rules of thumb aside consider if the long bond is 6% would you be happy with say an equity return of 6% (which provides additional tax benefits because it is deferred until sold and also subject to lower tax rate)? That equates to a pe of 16.6 and a price of 46.6. The key issue here is future growth beyond the coming fiscal year. I propose that the question of growth beyond one year is the missing element and the reason the stock is not higher right now. I believe for the most part that growth will continue for a couple of years because most dd makers have committed to MR technology for better or worse. A company like Western Digital has taken write offs of 100 million in the transition to MR. I just find it unlikely that they could switch in a short period to any other technology and take another write-off of that dimension. Finally, as I mentioned previously, Innovex has some cash that it is apparently going to use to buy something. If it is done wisely it will only improve the situation. Two quarters of great earnings are going to turn the stock price around, so by April 20 look for the stock to be around 40. Now, for anyone who thinks I know what I am talking about let me tell you that I have been a buyer of Datum as it dropped from 40 to 28 to 20 to 18 (when i really started buying) because their decrease in sales was supposedly only an inventory adjustment, only to get killed this week when they announced other problems and the stock dropped to 14+. Buyer beware.