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Technology Stocks : Speedfam [SFAM] Lovers Unite ! -- Ignore unavailable to you. Want to Upgrade?

To: Proud_Infidel who wrote (2728)	2/8/1998 9:22:00 PM
From: Michael Burry	Read Replies (1) \| Respond to of 3736

Competitiveness and value are not mutually exclusive. The high capex required in this industry is simply a ticket to play the game. heir investment will be a good one as long as they can maintain technical superiority, and therefore reasonable profit margins. Actually, the investment will be a good one as long as it produces free cash flow over time above its cost of equity. As shareholders, we should expect that at some point R&D and Capital expense will be so superseded by cash flow that you will have loads of cash flow left over after the capex. Speedfam is chronically negative on this count - (negative 10 M in both 96 and 97, and negative 32 M in first 6 mos of 98) with a very high -and getting higher- working capital requirement quarter in and out as well. As a result,we've seen the dips into the secondary market. Meanwhile, return on equity has fallen from 28.5% in 96 to 18.7% in 97 to just 9%. Speedfam may attain scale economies all by itself through internal growth, solving this problem. This is where I don't understand - what is the lifecycle of its product? If much of the capex results in obsolete capital 3 years from now, and all that R&D is being pumped into a new product that will ultimately cannibalize current products, then Speedfam really becomes a cyclical with a ceiling. You live with a lot of risk in a one-product cycle in high-tech cuz the best and brightest are fighting to beat you. As Mr. Morris pointed out, the endpoint might be being gobbled up by bigger players. The huge players can have the scale economy to realize significant free cash flow on their investment. Intel is a cash machine because it is so huge that it realizes massive scale economies on any R&D and Cap Exp. Of course, that right there is the big barrier to entry for its competitors. And of course, its product is not a big-ticket capital investment. Mike