Mike,
As you well know, valuation is a very dicey proposition at best, and it comes close to crystal ball gazing when dealing with growth stocks. But let me start with a simple-minded hypothesis: CTXS will grow cash flow at a rate of 30% pa for the next 10 years, at which point it will suddenly become mature and trade at between 12x and 20x operating cash flow.
Last year, operating cash flow was $184MM, so at this rate we would expect OCF to be around $2,537MM, and the company would have a market cap of around $30.5BB.
The number of diluted shares outstanding has been growing at around 5% per annum, so in 10 years we would expect 315 MM diluted shares. This scenario implies that in 10 years the shares would be trading at roughly $97. If the multiple were 20 at the end of 10 years the shares would trade at roughly $162.
Given that CTXS is currently trading at around $70, the annual appreciation varies between 3.3% and 8.7% for the holding period.
The implications of this are clear. Based on the current stock price, investors expect higher growth rates and/or a longer hypergrowth period. Considering the riskiness of the stock it seems to me that the market is telling us that it expects growth well in excess of 40% for 10 years or more. But if you look at the historic growth, CFFO has grown around 37%, and if you calculate it on a per share basis, growth has been a more modest 30.7% per annum.
I orginally bought into the company at $23 based on the expectations I outlined above. And those same expectations lead me to sell at $60.
So what is the fair price of CTXS? I don't know, but it certainly isn't $70. I would think that something less than $40 makes sense.
So why is the price of CTXS so high? I believe there is a logical disconnect between the way people think about stocks and the way they might approach buying a business. Only a raving lunatic would buy an entire business for 100x operating cash flow. It would require a certain degree of madness to buy at 50x OCF, and purchasing at 25x operating cash flow would certainly trigger questions about one's sanity.
TTFN,
CTC |
