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No. of Recommendations: 4
Keith,

The authors are very clear that the tornado is measured by revenue, not earnings. The reason earnings aren't the proper gauge is because earnings are subject to other issues that have absolutely nothing to do with product adoption. Earnings can be impacted by changes in R&D spending and other costs of doing business, changes in income tax rates, and sales and acquisitions of businesses. If you're thinking of earnings per share, that can be affected by all the above as well as increased or decreased shares outstanding.

Because the tornado is a symptom of product adoption, the only way to measure the rate at which it is being adopted is to measure the rate at which customers are paying for it. That's revenue.

Though the authors are clear that revenue is what we use to determine the existence of a tornado, they aren't aren't clear about what rate revenue growth is clearly that of a tornado. Anything in the range of 100% annual growth or more is a reason to examine the possibility of a tornado. At the extreme, sequential quarterly growth of 30% or 40% is a clear sign the tornado is in progress.

Based on your thinking that the tornado is all about earnings, I think it would probably be helpful for you to revisit the discussion in the book of tornados, what they are about, and how they are measured. During the tornado, a company conentrates on increasing market share (revenue), not margins (earnings). It's after the tornado ends that a company concentrates on increasing margins.

I'll wait to hear from Tinker before I give you my thoughts on Gemstar. After all, I'm open minded to the possibility that he might change my mind. :)

--Mike Buckley
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