Part IV - MYSW stock valuation
MySoftware is still a very small company, with a market cap of only $75 million, and is still pretty much unknown. As a small cap tech company, one must approach the investment as a venture capitalist would since the liquidity is fairly low and the risk is fairly high. I, however, think the upside could be huge and far outweighs the downside.
The company just turned profitable in 1998, and is now growing earnings at a nice clip. There is only one analyst (who has a BUY rating on the stock) currently following the stock (there was 2, but the analyst as Volpe left to join E*Offering, Etrades new investment bank and research outfit, so she had to drop coverage until she gets up and running at her new job). The analyst at Van Kasper in looking for $0.36 in 1999 and $0.55 in 2000, giving the stock a forward P/E of 46x 1999 and 30x 2000 EPS (current price is 16). The company earned $0.10 cents in 1998 which gives a trailing P/E of 160.
These numbers are based almost entirely on growth from their software business, and for a software only company, would make MYSW fairly valued (based on the projected growth rate). However, I think their online business is going to be successful giving the industry research that I've done and the great strategic partnerships that they are forming (plus I strongly believe in the management team). Even if the website is only moderately successful, there could be sigificant upside to those EPS projections. Plus, then you need to take into account an Internet valuation as well as, IMO, a takeover premium.
In essence, one gets to make an investment in a growing software company with a top management team very early in the game, AND gets the bonus upside of a potentially HUGE Internet business, in which they the first and only player. This is why I believe the stock is so attractive at the current price.
The only reason why, IMO, the stock is where it is right now (which I think is very undervalued) is because it was not an online business from the start (ie there are no big name investment banks and analysts who were involved in the IPO actively promoting the stock), is still small enough to remain unknown to most institutional investors, and plays in a market that isn't on anyone's Internet radar screen, yet.
In the next year, I think we will see a few things. More partnerships and significant announcements to promote and expand their small business web services. The possiblity of a small secondary offering to increase the float and the liquidity, stimilute instituional interest and generate more big name analyst coverage, and the continued outperformance of estimates, quarter after quarter. For these reasons, I am long holding on tight (in at 13 bucks) till we see $30 bucks or higher (I think 50 plus isn't out of the question).
However, this is a risky investments, and, like I said earlier, must be viewed kind of like venture capital, you are betting on the viability of the idea, faith in the management team, and the promise of future liquidity along with a MUCH higher stock price if things go right.
Hope this was enough ;) I'd be glad to answer any further questions you might have.
-Enam |
