POST OF THE DAY
Metricom
Patience is a Virtue

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By quickfix
January 26, 2001

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I have come to believe that not only are Metricom investors absolutely right about the potential for Ricochet, they are also impatient. Investors these days seem to believe that wealth is created overnight. Moreover, they seem to believe that the potential of a company should be reflected immediately in the stock price. There is no other explanation for the behavior of the market and Metricom's stock price fluctuations for the past 18 months. What other reason is there for a stock to go from $6 to $106 and back to $6 within a relatively short period of time?

Furthermore, analysts who really have no deeper understanding of the business, or the technology, give investors whiplash with their ever-changing stock ratings. Who really follows these guys anyways? If anything, this past year has demonstrated that analysts have absolutely no clue as to what drives the market. They seem to gain recognition not by being right, but by making bold and utterly baseless predictions about future valuations.

So what's the bottom line for Metricom? Nobody, including the company executives, really knows. They didn't know 18 months ago, and they don't know now. It's simply too early to tell. Sure, Ricochet has some pretty amazing performance numbers, but so what? The only thing that determines the true value of a company is its free cash flow. No company stock has ever retained lofty valuations without free cash flow. That goes for all the dot.coms and the Amazon's as well. Free cash flow counts! Sure, short-term stock valuations are driven by perceptions, but long-term stock valuations are driven by free cash flow. So long as Metricom's revenue does not grow and it is unable to generate free cash flow, its stock price will be subject to wild gyrations. I suppose that is a good thing for a day trader, but it means nothing to someone who is a long-term investor in the company.

What's my point? It's simple. If you really believe that Ricochet is going to attract a lot of subscribers who are willing to pay $75/month, then you should buy the stock and sit on it. Ignore the yo-yo effects of the market. Unless something fundamental changes, you should be able to forget about your investment for 3 to 5 years. Furthermore, don't expect your long-term return to be much more than the market average. If it is, then be grateful, but acknowledge that chance has a lot to do with it. If you don't believe Ricochet will be able to generate enough revenue and cash flow, then sell the stock and forget about it. Don't look back.

I recall a discussion on this board which questioned whether a CAGR of 22% was enough. Considering the fact that the historical market average is around 12%, 22% is huge. Think about it! The economy doesn't grow at 12% a year, it grows at 5% on a good year. So, why should stocks grow at 12%? Inflation doesn't account for the difference. It's because many companies fail. Those that fail, cease to exist. When they cease to exist their stock is no longer traded. Hence, only companies which survive contribute to the 12% growth rate, while economic growth figures include all economic activity. Now remember that 12% is the mean growth. For a company to grow 22% a year for an extended amount of time implies that it is way out on the fringes of the investment envelope. It is very unusual. So, if in the long run your return on Metricom is greater than 12% be thankful. But it is way too early to say that Metricom has failed just because the stock price is so low. This is because currently there is no information that allows us to judge the true valuation of Metricom. It is entirely speculative.

In the mean time, don't use margin and don't play with options. Those are short term investments and, in the short term, nothing is for certain. Ironically, your chances of making money gets better as your investment horizon gets longer.

Patience, Grasshopper. Making money is never easy, and never was.

-Q