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Technology Stocks : Wind River going up, up, up! -- Ignore unavailable to you. Want to Upgrade?

To: mac who wrote (4424)	3/9/1999 10:25:00 AM
From: Bomar	Respond to of 10309

Mac, nothing here...

To: mac who wrote (4424)	3/10/1999 2:10:00 PM
From: Allen Benn	Read Replies (3) \| Respond to of 10309

Deja Vu All Over Again. It is true that some analysts knocked a penny off the first quarter, and a couple off the year. Without doubt in my mind these reductions affected the stock as you indicated, and they will weigh on the stock in the near term. But what's new? We start every new fiscal year with under-whelming estimates that slowing adjust to superb gains over the year. There doesn't seem to be anything unusual about this particular year, except that the company is larger than before and the Street believes even more strongly that WIND cannot continue to outgrow the sector indefinitely given its prominence. The Street argues thusly: The sector is growing at 25%; WIND will continue to take share; so WIND will grow at 30%, but not much more. Consequently, the analysts have adjusted their estimates, as they often do, to understate 30% slightly, leaving room for upside surprises demanded by the market. The counter-argument to the “slowed growth” theory is that there is no “the” sector. New market niches are opening, or coming into bloom, every year, and will be for many years. The Post-PC wave of computing is still in its infancy. In fact, the PC wave has not yet peaked, and may not for another few years. Why are we beginning to view embedded systems as having already enjoyed its best growth periods? While company size generally is considered a deterrent to high growth, in the new economy this may not be the case. Today, size may be your friend, perhaps to the point of making high growth easier from a large base than from a small one. The point is that nobody knows how fast WIND can continue growing over the mid-term. Since “making the numbers” is viewed as critical to the market, management prefers keeping the bar at a very conservative level. Think of analyst estimates as a sales quota, and imagine that you just finished another great year. After celebrating with toasts all around at the annual awards dinner, how would you like to awaken the next day only to discover that your quota for the next year not only is bigger, but the percentage increase is on par with what you somehow achieved with accolades last year? I guess this is the classic “what have you done for me lately?” For these reasons, it is unreasonable to expect management to guide analysts much beyond 30% growth. Actually, it is the analysts job to try to resolve the conundrum above about the conflict between modest sector growth, on the one hand, and expansive opportunities on the other. There are two ways to do I know to do this. The first involves projecting unit growth by market niche, and converting the result to revenues by using assumptions about market share and average selling price. Not only is this approach thwarted by the difficulty of obtaining market niche growth estimates, but also none of the embedded systems tools companies provides details about market share and price experiences. For this reason, I don't think anyone uses this method for forecasting in the embedded systems space. Too bad, because this is the best that can be done. The second way is to impute underlying growth rates from a close inspection of WIND's performance over the years. None of the analysts covering the company I have talked to has attempted anything sophisticated using this approach either. As far as I can tell, all the analysts cover the company by using anecdotal tidbits from customers and other opinionated technicians. And of course they rely heavily on company guidance. This means their estimates essentially are a combination of sales quotas and gossip. I have tried doing the first method using extremely crude growth drivers, but too many assumptions have to be made to justify using the model to sway opinion. As the only alternative, I have done a lot with imputing growth rates, which seems to work well enough to lend concrete evidence to expected future directions. I'll try to post my most recent results, along with the procedures so you can duplicate, or improve, them, before I leave for the jungle Friday. Allen