I'm not yet short on DDIM but I'm seriously considering ... I'm doing some analysis on the company similar to what I did in Zitel ... my main argument about all these Y2K stocks is the amount of the UNKNOWN ...
The only thing separating an INVESTOR from a SPECULATOR, is his ability to quantify the UNKNOWN ... Even the great growth companies like Ascend, Cascade, Peoplesoft still have a degree of the unknown, otherwise, there's no point in risking because reward is minimal ...
With my favorite short, ZITEL, I have listed the UNKNOWNS, and will try to quantify based on probability, history, and just plain common sense: Here's what I've come up.
1. Matridigm's product will be successfully beta tested - highly probable
2. Matridigm will generate decent revenues - a better than average chance because the demand will be there ... but this will depend a lot on how they can make their prices stick
3. Matridigm will be the best of breed, blowing the competition - if there's one thing that's true in corporate America is that a hot market attracts competition
4. Matridigm will make tremendous operating profits - even the most successful growth companies take about a year to become profitable
5. Matridigm will continue growing way beyond the year 2000 ???
I could go on and on with this list, and with each entry, it just becomes tougher and tougher for me to comprehend why some people will assume that all these risk factors will turn out favorable for Matridigm ...
SO I DECIDED TO GO SHORT, because I need only to quantify one of the UNKNOWN, and be convinced that it's not going to happen ... And what I chose is the TIME FACTOR ... what's ironic is that all these Y2K plays are about a ticking time bomb, yet most of them are one ...
Just the time factor alone, changes the whole scene. It is my STRONGEST conviction that Matridigm, if indeed it makes money, will peak in 1998. True, 1999 should not be set aside, but if there's one thing I've learned about Wall Street, it discounts everything ... when revenues start to slow, they overreact and think it will be flat the next time ... if it becomes flat, they'll think it will be zero next ...
With this basic assumption, any valuation I put on the company is going to be based on what it will do in 1997 and 1998 ... Now, question is, should I do the traditional PE analysis ... the answer is no ...should I do the traditional price to sales analysis, the answer is no ... what I'll use is plain COMMON SENSE ...
Since I've assumed that the company will be virtually worthless by 1999, I then just have to ask myself, will the company, after operating for 2 years, have at least $750 million in the bank? In order to do this, within the 2 year time frame, they have to gross at least $5 billion, assuming a decent 15% operating margin (which in itself is hard to achieve in a 2 year time frame) ...
. Matridigm, is currently being valued at 750 M based on the value of Zitel's core business, 7.8 Million shares outstanding, closing price of $38, 33% equity stake ... Now, this valuation can change depending on several factors like :
a. astronomical improvement in Zitel's core business - highly improbable
b. dillution caused by Zitel issuing more shares, exercising options
c. dillution caused by Matridigm selling chunks of the company -
d. Zitel's share price going up
MATRIDIGM'S CHANCE FOR SUCESS IS LIKE A 10-POINT QUIZ ...
IT'S TOUGH TO GET A PERFECT SCORE ...
AND 9 OUT OF 10 JUST DOESN'T CUT IT
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