That's the $13 trillion question. porc is a "late adopter". He waited until the price of hand held calculators fell to $6, before buying one. He will only buy the solar-powered kind, to avoid having to buy replacement batteries every six years. He buys and upgrades PC's to stay one generation behind on the technology curve, but one generation ahead on the price curve.
Consequently, he has been recommending that people *not* buy AOL for the past 3 or 4 years. Meanwhile, people have made fortunes (on paper at least) by ignoring his advice. Yet, he never seems to learn. The higher it's price goes, the less he wants to buy the stock. Now that AOL's p/e is 729.55 (on "peak earnings"), he is all the more adamently against investing in one of the truly great success stories of our time.
In fact, it continues to be his position that AOL has never made *any* money in its entire existence. This would make its p/e infinite, which is all the more reason for momentum investors to profit from it. Further, it's price to sales ratio is still under 52, making it even more attractive.
However, what he refuses to understand is that just because the SEC has already twice forced AOL to restate its earnings to more accurately reflect their nonexistence, it does necessarily mean that this is about to happen a third time. The culprit on this occasion is our old friend, "accounting for goodwill". AOL's recent $9 billion acquisition of Netscape was booked as a merger of equals, with profit and loss statements, balance sheets, etc., consolidated to show that this is a "community property" kind of a marriage. However, lest the cynical SEC perceive a fraudulent marriage, the newlyweds are not allowed to sell off significant amounts of assets for at least two years after the nuptials.
However, in the union in question, it is no secret that a sine qua non of this arrangement was that the amorous Sun Microsystems have its way with NSCP's commercial intranet assets.
There has been much public display that this is some sort of menage a trois. But, rather than viewing this as a true marriage of equals, a cynic might infer that AOL bought the NSCP assets it wanted, and sold off the rest to SUNW. Not that there is anything unbusinesslike about such an arrangement, but a ruling to this effect by the SEC would push this merger into the "purchase accounting" category.
And, as has been discussed in earlier postings, present rules for purchase accounting require that the difference between the price paid and the tangible equity acquired be deemed "goodwill". Goodwill, in turn, is defined to be a depreciating asset, and therefore annual sums reflecting this depreciation must be deducted from the acquiring company's income statement.
Alas, NSCP had little net equity, relative to the $9 billion (in AOL stock) paid, which would imply an enormous goodwill burden upon AOL. Estimates vary widely, but basically the result would be that AOL would once again have to restate their supposed profits into accountancy nonexistence.
But, not to worry. AOL will thrive on e-commerce, a burgeoning field in large measure because, to the consumers' great benefit, it reduces sellers' margins to zero, or less.
Turning to your specific question regarding the advisability of investing in an industry in which prices inexorably fall, the answer, I think, illuminates the whole issue of deflation generally. I have a vague recollection that DELL's inventory turns are in the neighborhood of 180 times annually. While it seems to me that my memory on this must be faulty, whatever the true figure, I do recall that it is enormous relative to most manufacturing companies.
Falling prices, short of an actual collapse, are not that troublesome in an industry in which the gap between the purchase of inputs and the sale of outputs is only a few days. But, where the lag time is significantly longer, say chip making, the consequences are ruinous. And, as this is written, the Taiwanese are ramping up for even greater chip production.
Of course, it is impossible to have an economy in which some industries do not of necessity have long lag times between purchasing inputs and selling outputs. For example, agriculture. I can see no real world scenario in which low-margin mature industries with long intervals between buying inputs and selling outputs would not be ruined by persistent deflation. |
