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No. of Recommendations: 7
Oh goodie, there are lots of juicy tidbits on the GG board this AM.

Padavona wrote:

My point being that in Cisco you had clear hypergrowth in arguably the most important infrastructure role in tech for the 1990's. What is it about Brocade's hypergrowth which commands a P/S over 130 and a P/E pushing 800? Somebody please give me a YPEG which suggests this company will grow 800% per year for 5 years. Redback's P/S is over 140 now. So much for it being the "value play" among next gen networks.

Cisco's y/y revenue growth after going public in 1990 for the router market was this for the four quarters:

March - 132.6%
June - 112.5%
September - 132.6%
December - 173.7%

Wellfleet's for 1990 was:

September - 240.6%
December - 239.2%

In the third networking tornado for Cisco which began by the numbers in Q1 of 1994, they had purchased Kalpana and Crescendo in Q3 of 1993. They also bought two private companies for the LAN switches space. Grand Junction and another. These acquisitions in combination with in house developed LAN switches finally showed this kind of revenue growth in 1996 and 1997 for a royalty game:

1996

March - 313.8%
June - 361.4%
September - 250%
December - 157.1%

1997

March - 108.3%
June - 81.4%

At this point Cisco had the dominant share in the LAN switch market and the hypergrowth had slowed. Their position was King, not gorilla in this royalty game.

No need to point out the intelligent hub and remote access tornado activity as well that Cisco participated in, as the routers and LAN switches had the most impressive y/y hypergrowth due to the acquisitions and because they became the dominant brand.

You'll want to try and compare the types of revenue growth that certain companies in the IP/Broadband "next generation network" space are experiencing for their respective technologies. I believe you will find a lot of 350% to nearly 500% y/y numbers at the moment. Does that mean they deserve a higher multiple than Cisco did in 1990 for the 112% - 173% y/y revenue growth in the router market? You think not, but the market seems to be thinking they deserve something. Even if you strip out the momentum players from all of the candidates, the multiples would still be very rich. I'm realistic and cannot argue with that if I compare it to some other investments that I hold. I'm not sure I would use a straight analogy and say, let's see, Q2 y/y growth for Cisco in 1990 was 112% and the market multiples were x and x. Brocade's most recent Q y/y growth was 4 times that amount. Therefore, the multiples should be 4X and 4X. I don't think it works that way. Each case is unique. Very unique. Toss in the historic return for early Cisco investors who held and you're not going to find many complaints. I can't predict I will say the same thing 9 or 10 years from now for Brocade, but I'm willing to see.

Brocade's management sees triple digit growth for their current market into 2003 using conservative figures. Who's to say they will not enter, like Cisco, via acquisitions or in house product design other tornado markets like Cisco did in the 1990's? If there is any management team that has studied the chasm, tornado and standards game better than Brocade - I'd like to meet them. We cannot predict 5 years out from now without getting into some very serious witchcraft and WAG'ing. It's a current Wall Street darling and one of the most successful IPO's of the 1990's. Part of that is because they waited to go public until they were up and running with a healthy balance sheet in an industry poised for some serious growth. All of that being said, I'm not implying it is a 'safe' investment. Risk cannot be removed from any investment.

I'm not here to justify the current market multiples of my personal investments. However, I would point you to look at the y/y growth for any you question as well as the competitors and the potential market space of each technology. These are real games going on right before our eyes. It's the end win that the basket approach allows the winner to be 'captured' in one's portfolio. My thought is that the way to administer this strategy is, of course, to have shares of the company in my portfolio. My wife is a recent investor as well because Mr. Ashok Kumar downgraded the stock. I wasn't expecting it to double in a month, but did expect the longer term to do quite well. What the share price does between square one and square ten doesn't concern me because I cannot predict that, nor can I time that outside of the opportunity presented by a downgrade in a nervous market. It's a high risk/high reward proposition, but using the basket strategy with eventual consolidation allows some 'protection' if theory proves to be correct. By the time Brocade had its IPO last year, I saw enough evidence to go with it. I've been watching the others closely and have posted Q results on this board of all the players, but many other elements still keep me out of them at this time.

I did the same with Siebel and i2 in 1998. Too much evidence for me at those early dates that they had carved out their respective niches in a healthy enough of a way to maintain longevity.

You can't forget that we were in a Gulf War and a bear market in 1990-1991 when Cisco had their IPO. It was a dismal two years of returns for most investors including myself. Following that we had interest rates rising into 1994 before that cycle finished and launched the end of 1994 - 2000 market. There are a lot of elements to weigh in as you try and study and compare things. I continue to believe each story, each technology and each company are unique instruments of study. I don't want to rush to make conclusions that everything needs to fit into the same mold.

To satisfy dbphoenix, I will say that I've put my real, hard earned money to work in a number of these candidate companies with very rich market multiples. That is not in any way an endorsement for others to do so. In fact, we're in times like none other. Aggressive growth is aggressive growth. The risk tolerance must fit the profile of the investor and the portion of one's portfolio that is devoted to it must be a cautionary portion that meets one's strategy. Even though I have no idea what it is going to be, I'm more interested in the next 5 years of growth for companies like Brocade, Redback, Juniper and many others. That's not to say this quarter or next or last are not 'check points' along the way which I glance at to see how things are progressing. I do, but the focus is longer. I have a core portfolio of other investments that carry a lower degree of risk. Some would argue it's because I'm not confident enough to swing for the fences with just a few investments. There might be a degree of truth to that. I can tell you I wouldn't feel comfortable holding only 6 stocks that all had market multiples like Brocade, or Redback, or i2, or Ariba, or Juniper, or Foundry. I can also say I wouldn't be comfortable reaching some of my goals holding only stocks that had market multiples with a P/E's of 12-15 and PSR's of 1 - 5.

I cannot micromanage because of the valuations. I 'want' them in my portfolio for the games being carried out. I did add to my positions when many of them lost well over 50% of their value not too long ago. Having them out of my portfolio doesn't allow me to play the strategy. Not all of them will win. Some will. That's the nature of the beast. I'm a tortoise who's willing to wait it out on all of them to see what develops. I will make mistakes along the way.

I'm not sure if you were making the point of Cisco being "overvalued" from 1990-1994 or not. I wouldn't doubt many analysts claimed it was.

There were analysts screaming from the top of high rise office buildings how overvalued Cisco and other tech stocks were at the time. They were on CNBC, they were in the papers and in the monthly periodicals. They were calling their clients on the phone and screaming churn baby, churn. I know - I had a broker in the early 90's. I lived in the Bay Area at the time and Cisco was more than a common word floating around, believe me. There were analysts screaming that the PC era was over. Dead gone and decomposing. Knock, knock said the Internet in 1994. The Internet continues to be the largest gorilla we've all laid our eyes on in our investing lives. Too bad we can't buy shares....

BB



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