Mgsam, your bullish case is compelling--here is my rebuttal.
You mentioned that production constraints are old news. Yet the company said in its 6/3/96 press release that capacity for 1996 is only 5 million Zip drives. I believe the people that are assuming this company does $1.6 billion in revenue are estimating 8 million drives will be sold in the 3/97 year as stated incorrectly by the iomega product manager.
Notwithstanding the wonderful job Iomega has done promoting its product and stock, I just do not believe the stocks valuation should be $5.9 billion (143 mm shares x $41). Are the executives that hold options on close to 14 mm shares at $2 per share really worth $546 mm dollars. We'll see in sixty days when a lot of them try to cash in.
If the company encounters some competition or if sales slow, no cushing exists. Say the company only does $1.2 billion in sales--still 135% growth--and the stock market gets sloppy. What's the value of the stock then? 2x's revenue would yield a stock price of $17. Further if Iomega's products become more of a commodity 1 to 1.5 times revenue is more appropriate. Now on the other hand, if you are right, What's your upside? $5 billion in revenue three years from now with 13% net margins. (very optimistic) This yields $650 mm in net income. Shares o/s will probably be 160 mm. Since the company clearly will be more mature, a p/e of 15 or a price to revenue of 2xs seems fair to generous. Thus your best case in three years, in my opinion, is a)$60 to b)$62.50 per share. a)$4.06 net income times 15 or b) 2xs $5 billion \ 160 mm shares. Present value these projections and you get a best case current valuation of $50 per share--approximately where I shorted the stock.
You've probably heard all of this before from prior shorts, but remember other shorts were shorting a $1, $2, $3, or even $4 billion company. I shorted a company valued at $7 billion. Wayne Huisenga (sorry I am not a sports fan and probably misspelled his name) was asked on CNBC why he sold Blockbuster Video for $8.4 billion when its prospects were still so good. He stated that it is much easier to take a medium valued enterprise and turn it into a larger value then to take a large enterprise and turn it into a mega company.
I just believe the best case scenario is already in the stock. Thus, in most instances I win and in the others I lose some or break even.
Joe Rizzo
JMR Trading |
