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On Webs and Meshes

Written by Brian Hicks
Posted January 31, 2006

You may remember that in my original write-up on AMD, I gave a price target of $39 a share. This was during a period when AMD was trading for around $25 a share.

Well, as of this writing, AMD has reached a high of $42 a share, a gain of 62% since my recommendation just a few short months ago.

Now, you may also recall that I discounted the price target from my "true" price target. I did this to be on the conservative side.

But I think it's time we revise our estimate.

Here it goes:

Analysts have AMD's earnings growing from $1.83 in 2006 to $2.51 in 2007. That's a growth rate of 37%.

Growth stocks typically enjoy p/e multiples higher than value stocks. Growth investors value growth stocks using what's known as a PEG metric. PEG stands for PE to Earnings Growth.

In a nutshell, a growth stock can support a p/e multiple equivalent to its earnings growth.

So if we take AMD, apply a p/e multiple of 37 to it, we arrive at a price target of $67.71. How did I arrive at that price? I multiplied 37 by 1.83 (the '06 earnings estimate).

I know $67.71 sounds like it's a lot even for a year from now. Well, it is. But we completely underestimated AMD's potential in our initial recommendation. I won't do that again.

Now, let me tell you about an exciting AMD-related tech trend.

More Inter than Ever

It sure is scary business, this Web we keep hearing about. There's spyware and viruses and endless assaults of scandalous e-mail solicitations. It is also a money mill, sprouting some of the most successful entrepreneurs and firms (after the tech crash shook off the barnacle) since the Industrial Age dawned.

Pretty soon, no matter what you think of the information superhighway, its lanes will weave around you and through you, part of a truly worldwide web with few barriers to access.

When I first locked in on AMD as a slept-on China tech play, I touted the vision of AMD's involvement in selling $100 laptops to developing countries for distribution to underprivileged children.

Last week, the UN Development Program and the One Laptop Per Child program signed a memorandum of understanding at the World Economic Forum in Davos, Switzerland. OLPC has commitments from AMD, Google, RedHat, Nortel, and others to make One Laptop Per Child's name a reality.

I am not mentioning this program again just to give AMD and the UN a pat on the back for humanitarianism, I am mentioning it because of the slew of ideas it brings to mind for the future of the connected world.

The $100 laptops will have the capability to communicate through mesh networking, meaning that despite no internet connection in a rural area, OLPC participants can create their own private circuit for sharing information.

Money in the Mesh

A Madrid company now wants to make money on the exact same principle - internet networking based on individual users, not servers.

Around the world these days, anyone with a laptop and a wireless internet card can stroll a city street and walk in and out of various business and residential "hotspots," or places where a wireless internet connection is made available.

A Madrid company called Fon is creating a network of those existing networks for sharing by all users who participate in the program. The service is already available in the United States in some places, which may conflict with ISP service agreements that prevent users from sharing their connections. The regulations will have to be dealt with soon.

Peer-to-peer file-sharing programs, which came after server-based networks like Napster were shut down or turned into pay services, are based on a similar principle to the OLPC mesh and Fon's business model. The principle is that each module can act as a relay node in a much larger system, and that with each unit added, the performance of each module will gain a boost.

Recent Verizon Wireless commercials boast of that mobile phone provider's reception power, showing the network as masses of Verizon users accompanying each other everywhere they go. Microsoft countered the importance of OLPC in Davos, saying that cell phones should be used as transitions to personal computers since they are much more widespread and can be adapted with a dock and keyboard. The idea of user-based networking is obviously not limited to computers alone.

- Sam Hopkins
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