Profits matter more than revenues.
When you buy shares, you're buying a portion of the assets of the company, plus the intellectual property and other intangibles that produce assets in the future. Revenues are are only important if a profit can be made. If Wind River turns into a billion dollar company overnight, it will not increase the value of the shares if they lose money and have no hope of earning money in the future.
In addition, you also need to take into account the number of shares. Wind River could merge with a company with similar revenues and instantly double their revenues, but your shares wouldn't be worth any more because the new company must be paid for with new shares, cash, or some other consideration. This is the mistake you made with Wind River, because the company diluted the stock each time it purchased a company and made initial public and secondary offerings. The stock was also diluted each time employee stock options were exercised and the company fulfilled the obligation by issuing new shares rather than purchasing shares from an existing shareholder.
Conversely, Wind River could sell a division and the revenues would fall, but the value of your shares wouldn't decrease because the consideration paid by the buyer would increase the assets. This is the mistake you made with Phoenix, because they sold 80% of 2 divisions in 1994 that had been contributing more than 50% of the revenues and an even greater portion of the profits. Even though the revenues dropped in half, the value of the shares did not decrease because they were paid cash. Each of those divisions is now worth more than the original company and they retain ownership of 20% of the shares of one company and 13.5% of the other. The other 6.5% was sold in an IPO in 1996 (NASDAQ:XION). Venture capital companies operate in a very similar manner.
The value of Wind River is the sum of the value of their tangible and intangible assets. The value of the tangible assets is $108.5m or $5.79/share. This is a very accurate number because $102m consists of cold hard cash. It would be much more difficult if the company held assets that appreciated such as stock in other companies, or assets such as chip plants that depreciate in value.
The value of the intangible assets is much more difficult to calculate and depends on the ability of the company to translate these assets into tangible assets - earnings - in the future. This calculation is much more difficult, but it's extremely important because the intangible assets of Wind River are worth more than the tangible assets. Wind River is in the middle of a period of high growth. It would be foolish to value the company at $5.79 merely because the value of the remaining assets is more difficult to measure. In a future post, I'll present a few methods that can be used to calculate the intangible asset value. |
