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The new issue of Forbes ASAP includes several articles about "The Ramp" -- companies experiencing hypergrowth. This is tremendous reading for Gorilla Gamers. Of course it only addresses the tornado, not discontinuous innovation or the other aspects of potential or actual gorillas, but it could be a good start for primate hunting.

I was intrigued by the piece on the new Value Creation Index. When developed further, this could help us with valuing tornadic companies, adding to our arsenals of P/E, P/S, and P/V (Price/Vision), among others. I found it frustrating that the reader cannot soundly evaluate the VCI since the authors give no details about how they determined each measure. I tried hunting down the participating reserarchers, but nothing recent has been published. It seems the deal is that Forbes ASAP gets to publish results first. The Value Creation Index article is here:

http://www.forbes.com/asap/00/0403/140.htm

Geoffrey Moore's piece, "Measuring Up: Keep Your Eye on the Right Metrics" is here:

http://www.forbes.com/asap/00/0403/105.htm

Onward!

Max
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I've read Forbes picks..

The question i have, does anyone look at the expected P/E?

Brocade (not sure if they are listed, but nevertheless, is way overvalued) is expected to do .33 for fiscal 2000. Hey, a profit. Still if Brocade didn't go up another point from today, they'd have a 324 price-to-earnings a year from now. If Brocade didn't move till 2001, their p/e would still be 209 based on .55 for fiscal 2001.

Covad is the #2 company on the ramp champ list, but is expected to lose -$3.61 for fiscal 2001. No point doing this company.

If Redback didn't move a point till 2001 they would have a 199 p/e on .34 expected earnings.


Ancor is #10 on the list. Before they missed their last quarter by 50% and had lower estimates across the board, they were expected to do .13 cent 2001.

I'll just say Ancor does .10 cent for 2001, even though the analysts say they'll do -.04

If Ancor does .10 cents for 2001 (even though the analysts say they'll lose money), Ancor would have a 216 p/e ratio?


I understand people said the same thing about Yahoo, eBay, Amazon, Aol, ect... back in 1996/97/98 but seriously has this gotten out of hand? How do you justify these type of numbers?
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scrim1 wrote

The question i have, does anyone look at the expected P/E?

Brocade (not sure if they are listed, but nevertheless, is way overvalued) is expected to do .33 for fiscal 2000. Hey, a profit. Still if Brocade didn't go up another point from today, they'd have a 324 price-to-earnings a year from now. If Brocade didn't move till 2001, their p/e would still be 209 based on .55 for fiscal 2001.

Covad is the #2 company on the ramp champ list, but is expected to lose -$3.61 for fiscal 2001. No point doing this company.......

...I understand people said the same thing about Yahoo, eBay, Amazon, Aol, ect... back in 1996/97/98 but seriously has this gotten out of hand? How do you justify these type of numbers?....


Although I mostly lurk on this board I would like to take a stab at this. Any of the more seasoned GGer's please correct me if I'm out of line with my assessment.

Scrim your point about PE's is well taken and in some of these companies on the list it may be a real concern going forward, but with many of these companies in or entering hypergowth the critical metric is revenue and market share growth.

They do not and should not try to concentrate on earnings. Their primary goal in a tornado must be to grab as much of their market as they can and establish their pecking order/market share/gorilla position in these markets forever. This is even more important for wannabe gorillas in potential gorilla game markets. Slip here and your a chimp forever(and that's if your lucky). Well that's the short version.

By the way MaxMoore I read both links(one previously) and they were very interesting. The thing that bothered me about the VCI article was that they don't spell out how they calculated their figures or how they came to their original premise on how to valuate the different factors in their "formula that showed 90% correlation".
It reads a lot like datamining to me!(ie: we looked at a number of factors, checked how they correlated with market value, made a formula, then ran our companies through the formula, and voila 90% correlation) --- Duh! If I did a study this way I'd be shocked if I didn't get 90% correlation but then again I'd probably get laughed out of any journal I submitted it to. Maybe I misunderstood their methods because they went into so little detail but it seems an unusual way to set up a study.

Thanks again to all the folks on this board who have helped me immensely in understanding high tech and the GG better.

Drag




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drag,

You're right that companies need to concentrate on market share more than earnings in the tornado. But the two do go hand in hand. Once the tornado develops the spawned gorilla will have dramatically improving earnings.

For those who are concerned about the extreme PEs the market is willing to pay for Gorillas, I agree that some of them have become ridiculously high. For those that aregue it is the PSR we should look at in typical Gorilla-Gaming stressing of revenue, I would respond that PSRs are getting ridiculously high also.

Moore recently said that the market might be wrong but not stupid. Admission that it can be wrong acknowledges that even Gorillas can become overvalued at least on a very short-term basis. For me, that stresses the importance of thinking extremely long-term and igoring the periods when the market goes from being wrong and goes to being right by lowering those PSRs.

Price does matter to some extent all of the time.

Just my opinion.

--Mike Buckley
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I agree with the comment about methodology. Without seeing how they did their calculations, I wouldn't put much trust in these numbers. However, the results do seem to cohere with independent studies of value generators. I can dig up some links if anyone's interested. I've come across quite a bit of material on measuring the value of intangibles, and how this helps to value New Economy companies.

Regarding the top 20 picks in the Forbes ASAP piece, I did run some numbers. I don't have my notes with me, but I think FutureLink Distribution, Accrue Sofware, E.Piphany, and Viant looked like they could be a reasonable value at current prices. (Some of these have been moving up very strongly in the last couple of days.)

I'm not including JDSU, since I've owned that one for something like 18 months and I'm comfortable with its valuation.

Max
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I understand people said the same thing about Yahoo, eBay, Amazon, Aol, ect... back in 1996/97/98 but seriously has this gotten out of hand? How do you justify these type of numbers

I am not saying you are incorrect, but Moore et al. point out that the entire reason that the market regresses toward the mean in its valuation of gorillas, chimps, and monkeys is because the PEs of the gorillas look silly compared to the PEs of the other animals in the jungle.
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Sly,

Moore et al. point out that the entire reason that the market regresses toward the mean in its valuation of gorillas, chimps, and monkeys is because the PEs of the gorillas look silly compared to the PEs of the other animals in the jungle.

I don't understand your point at all, especially because Moore goes into great detail to explain why the valuation of gorillas and all companies thriving on a network effects-based business model regresses to the extreme, not the mean.

--Mike Buckley
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Original Message

Subject: Re: Ramp Champs (Moore on tornados in Forbes ASA
Author: MikeBuckley Date: 4/20/00 9:36 AM Number: 2185
Sly,

Moore et al. point out that the entire reason that the market regresses toward the mean in its valuation of gorillas, chimps, and monkeys is because the PEs of the gorillas look silly compared to the PEs of the other animals in the jungle.
------------------------------------------------------
I don't understand your point at all, especially because Moore goes into great detail to explain why the valuation of gorillas and all companies thriving on a network effects-based business model regresses to the extreme, not the mean.

--Mike Buckley
------------------------------------------------------- This is good guidance, seriously. Newbies like myself can often "talk the talk," it is "walking the walk" that is difficult, and we are grateful for the knowledge of the more senior members. Stvfox
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Sly (and Mike B.),

If I may - I think I understood your point (Sly) to be "that the market continually (or perhaps, better repeatedly) undervalues many gorillas" - "because the PE's of the gorillas look silly compared to the PE's of the others". (Liberally paraphrasing your sentence to impart a somewhat different sense.)

I think the part "regressing toward the mean" is confusing. Are you referring to other players in the same space as the "gorilla", or are you referring to the height of the P/E in relation to the "sea-level" of other equities in the entire ocean of the markets?

It seems that if at times the market is willing to grant an extreme P/E to a given "gorilla" - notably as in the recent super-bull market, it is equally likely (indeed, fully expected) to periodically sound the retreat from those very extremes - "gorilla" or not - during more sobering times (as lately). These are moments when "irrational exuberance" and the accompanying overvaluations of many companies simply reverses due to the overwhelming discomfort of such precarious heights. The susceptibility of market sentiment to shift toward "safer" valuations is in direct proportion to vulnerability, and the realization that prices (read, investor profits) may not be sustainable with the advent of even the slightest hint of a deteriorating business environment (i.e. slowing growth, higher interest rates, trouble abroad, etc.). We endured several months of such uncertainty, as prices rode higher on the momentum of increasing expectations.

Many would contend that the corresponding plunge we've witnessed was abetted by brokers and market makers who were the first to spot the opportunity to distribute at all-time highs, and catalyse a reversal. This is a cycle that repeats throughout history. It becomes very difficult to "buy low" in markets like we had - at least in the high-growth sectors of the market.

So, everything gets taken down in the subsequent rush toward liquidity, with little respect for gorilla-hood. Our good fortune!

Periodically, even in the midst of a bull-run - one gorilla or another will be downgraded or called lower, due to an earnings disappointment, et. al. Again, our good fortune! (We saw that happen with QCOM in January; with MSFT, with ORCL, with SEBL all at various times for different reasons.)

As Moore has pointed out repeatedly, it is simply too difficult to grasp the tremendous opportunity that these companies represent to investors. Even those of us aware of gorilla status are likely do be underestimating the potential. There are just times (like now) when such valuations seem too utterly risky to be "reasonable". (Who among us has not shied from risking capital at the "extreme" P/E's? So we draw a little off, or take some profits.) Even when we suspect that the P/Es are warranted.

As investors, we suffer collectively from impatience. But that is the stunning beauty of this type of analysis, as well as the opportunity.

-M.
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Sly

Moore et al. point out that the entire reason that the market regresses toward the mean in its valuation of gorillas, chimps, and monkeys is because the PEs of the gorillas look silly compared to the PEs of the other animals in the jungle.

**********

I don't understand your point at all, especially because Moore goes into great detail to explain why the valuation of gorillas and all companies thriving on a network effects-based business model regresses to the extreme, not the mean.

--Mike Buckley


We are both correct. I was talking about how the market temporarily undervalues gorillas whereas you are talking about how gorillas get valued in the end.

From page 119:

"But if investors are ever going to beat the market, then at some point they have to know something that the market does not know. In the case of the gorilla game this knowledge consists of two components:

1. The stock market will underestimate the returns that a gorilla can earn in a tornado market because the GAPs are so deviant from those of market leaders in other sectors.

2. The market will underestimate the duration of the Competitive Advantage Period because their CAPS are so deviant from those of market leaders in other sectors.

Of course, eventually the market will catch itself making these mistakes and correct matters."


Now, the regression to the mean point I was trying to make from p. 127.

"2. In the short term, however, the stock market is not good at pricing the stocks of companies in tornadoes or the stocks of gorillas on Main Street. In both cases the correct valuation appears drastically overvalued. So instead, investors price these companies "closer to the mean."

***

"And because it does not anticipate the persistence of the gorilla's competitive advantage going forward onto Main Street, it persists in underpricing the gorilla relative to the chimps and monkeys, again until very late in the game -- usually only after one or more chimps have died off. This double dose of persistent underpricing provides the foundation of the gorilla game."


Bottom line: confusion re short term vs. long term valuation of gorillas.
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This is good guidance, seriously. Newbies like myself can often "talk the talk," it is "walking the walk" that is difficult, and we are grateful for the knowledge of the more senior members. Stvfox

I don't know if I like this -- am I "talking the talk" or "walking the walk" under this scenario?
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mgk wrote

Sly (and Mike B.),

If I may - I think I understood your point (Sly) to be "that the market continually (or perhaps, better repeatedly) undervalues many gorillas" - "because the PE's of the gorillas look silly compared to the PE's of the others". (Liberally paraphrasing your sentence to impart a somewhat different sense.)

I think the part "regressing toward the mean" is confusing. Are you referring to other players in the same space as the "gorilla", or are you referring to the height of the P/E in relation to the "sea-level" of other equities in the entire ocean of the markets?


I was only talking about the former, but in my reply to Mike B's reply, I quoted material relating to both points you raise (nice coincidence -- huh?)
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Original Message

Subject: Re: Ramp Champs (Moore on tornados in Forbes ASA
Author: SlyAce Date: 4/20/00 10:58 PM Number: 2197
This is good guidance, seriously. Newbies like myself can often "talk the talk," it is "walking the walk" that is difficult, and we are grateful for the knowledge of the more senior members. Stvfox
-------------------------------------------------------
I don't know if I like this -- am I "talking the talk" or "walking the walk" under this scenario? (SlyAce)
-------------------------------------------------------SlyAce, I consider the "talk" and "walk" statements in my post to refer only to newbies like myself. Reading of your posts indicate that, unlike me, you actually know what you are doing. The ensuing discussion among senior posters such as yourself, MikeB, and mgsk (Sp?) was great and informative to those of us who have to do something differently because our beginner's luck is running out. Stvfox
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Sly,

Thanks for clarifying the short-term valuation of gorillas vs the long-term valuations.

Where I think you're use of the terminology is a little misleading is that "regression to the mean" is far different than temporarily pricing a gorilla "closer to the mean." The phrase, regression to the mean, implies the long-term tendency of the price to approach, get to, and having gotten there fairly permanently stay at the mean value.

--Mike Buckley
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Where I think you're use of the terminology is a little misleading is that "regression to the mean" is far different than temporarily pricing a gorilla "closer to the mean." The phrase, regression to the mean, implies the long-term tendency of the price to approach, get to, and having gotten there fairly permanently stay at the mean value.

I agree -- sorry about that.
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stvfox

I was kidding re the walk the walk post, and don't worry -- I am a beginner in dire need of a little luck about now.

Would you happen to be the Steve Fox at Jenkens & Gilchrist?
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I am not saying you are incorrect, but Moore et al. point out that the entire reason that the market regresses toward the mean in its valuation of gorillas, chimps, and monkeys is because the PEs of the gorillas look silly compared to the PEs of the other animals in the jungle.

SlyAce -

I do not specifically recall this from the book, but a very interesting thought crosses my mind from a valuation perspective:

It seems a company like Qualcomm with a P/E in the 150-160 range growing at 50-60% Year over Year can support their valuation well going forward. But what happens to a Cisco, with a P/E over 180 growing @30-35% per year? I wonder what it will do to the tech investor's psyche if Cisco is forced back to the mean for the long term. I am a Cisco holder, and I often note it is, at the current price, the most overvalued company in my portfolio (IMO).

Fool on
DP
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It seems a company like Qualcomm with a P/E in the 150-160 range growing at 50-60% Year over Year can support their valuation well going forward. But what happens to a Cisco, with a P/E over 180 growing @30-35% per year? I wonder what it will do to the tech investor's psyche if Cisco is forced back to the mean for the long term. I am a Cisco holder, and I often note it is, at the current price, the most overvalued company in my portfolio (IMO).

CSCO only gets forced back to the mean long term when a new, discontinuous technology comes along. That being said, I do agree that a gorilla might take quite a hit once it grows to the point where the law of large numbers takes over and prevents more hypergrowth, but I cannot remember if Moore discusses this or not.
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