Frank, I disagree with your fair market value.
And, I agree with MF Chiros@aol.com as he writes below:
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AndrewSubj: Fundamental Valuation of IO
Date: 96-05-25 11:49:46 EDT
From: MF Chiros
I had in the past stated that 3x sales of 1996 is reasonable and
conservative. Based on that, I had stated that 75(pre-split) is upportable. Since then, we've had a series of significant announcements. We have Acer, Packard Bell, and CRW's(respected trade mag.) confirmation of IBM's Aptiva line. These announcements give us visibility into sales and earnings of 1997 and beyond. This necessitates a re-evaluation of Iomg fundamentally.
IDC(a leading PC industry analyst firm) has said that the first(out of 3M's product, Mitsumi/Swan vaporware, any other phantom product, and Zip) to get relationship with 3 out of top 10 PC manufacturing firms will win the race to replace the floppy. IDC then predicted 40 million drives/year in 4 years. Now, Iomg has 3 out of top 5 PC manufacturers(although IBM is not yet official, I count it as 99% probability event--IBM should've denied CRW's confimation, otherwise). Not to mention, Micron and Acer. This means rest of PC manufacturers will fall like Dominoes... Zip has gotten to this place much, much faster than the CD-Rom did in it's product-cycle. Something to consider... This leads me to conclude that it is a 90%+ probability event that Zip will replace the floppy. (One has to laugh about Murphy's prediction to the contrary. He knows something IDC doesn't? He's shooting from the hip...)
So, what does this mean? It gives us visibility into 1997 and beyond. So, let me try to get a rough, but very conservative sales and earnings of 1997. I see 5-6 million Zip drives in 1996. I see double that as an extremely conservative position. So, 10-12 million Zip drives in 1997. I will take the tie ratio of 6 to 1 from 1997 drives. That gives us 60-72 million Zip disks. I will take 4 to 1 from 1996 drives. That gives us 20-24 million disks. This leaves us with 80-96 million Zip disks. Let me just take 85 million Zip disks. Let's take 9.99 as the retail price of Zip disks by then. That's 8 dollars whole-sale and 2 dollars cost-basis. I see 6 dollars per disk as profit then. That gives us 510 million dollars in profit from Zip disks alone. I say 10 dollars profit from Zip drives. That gives us 100-120 million dollars. Let's take 110 million.
I say 1 million Jaz drives in 1997 as an extremely conservative
position. I see 70 million dollars of profit from Jaz drives. Let me take 3 to 1 tie ratio. That gives us 3 million Jaz disks. I say 40 dollars of profit from Jaz disks. That's 120 million. I see 200 million in DITTO sales. That gives us 50 million.
Adding it up, I get 510+110+70+120+50=860 million in gross profits. I subtract 240 million dollars of SGA and R&D. That leaves us with 620 million. No interest payment(since we should raise 250 million from secondary). Tax rate of 39%(although a Republican President might lower this). I subtract 241 million. That leaves 379 million. That's 2.91 of EPS.
What should be the fair P/E. Normally, I would say 15 is a fair p/e for stocks(off of comparison with the interest rate). However, Iomg will grow another 100% in 1998 since the replacement of floppy basically guarantees it. So, conservatively, I will grant p/e of 30. But, wait. :) We have not taken account of razor/razor blade thing. So, I will give p/e of 40. That leaves us with a fair valuation of IO at 116 dollars per share in 1997. Discount it by interest rate and bring it backward, we get fair valuation of IO at 108 dollars per share in 1996(roughly). Now, keep in mind that this doesn't take into account sales and earnings from new products that IO will introduce(like laptop Zip, and others). I mean 250 million dollars
should go towards some productive efforts, no??? So, I think 100 dollars per share target price is conservative here from the viewpoint of p/e ratio.
Let's now take the slice from Price per Sales ratio. What will the
revenue of IO be? After the OEM announcements, I take the reasonable revenue prediction to be 1.5-1.9 billion dollars for 1996. I see nearly double that for 1997. That is 3-3.8 billion dollars for 1997. What is a good p/s ratio for a company virtually guaranteed to double revenue(due to momentum to replace the floppy) with recurring earnings from disks? As I stated before, 3x is a conservative ratio. Tom Gardner likes to take 4x. I personally agree with Tom, since it's silly to give only 3x to a company about to control a facet of PC globally. No other company since MSFT has managed that ever. But, taking 3x, that gives us 9-11.4 billion dollars market cap. Divided by 130m shares, that is 70-90 dollars per share. If we take 4x, we get 12-14.4 billion dollars. That's 95-110 dollars range. About the same
place as from the p/e standpoint.
It is ridiculous now to talk about 326m revenue number from 1995, and
say Iomg is overvalued or that it is a story stock compared to Hershey Foods. Iomg did 222m in the first quarter of 1996 alone. Even JP Morgan predicts revenue of 1.2B for 1996. Iomg is NOT a story stock here. The valuation off of sales and earnings gives us double from here conservatively speaking. Of course, IDC can be dead wrong. But, they have been the most accurate analyst firm in the past, and will continue to be. Those guys have Ph.D's in Computer Science and get paid mucho bucks to live and breathe the PC industry. Does one trust IDC or some Wall St. newsletter publisher on what will happen to the storage industry??? You be the judge, but to make money intelligently, you listen to the experts in the industry. Even common sense sides with IDC...
Warren Buffet likes to invest in companies that can be bought for less than 50% of it's fair value. Iomg is here qualified, IMHO(in my humble opinion)... I am very comfortable with 44.5. Frankly, it's dirt-cheap bargain from where I stand, from the fundamental point of view. Of course, there are risks. Some say Zip disk may be cloned. But, Iomg has 6 patents on Zip disks pending. Some competitor may emerge. But, it's too late now(at least IDC would say so)... There may be nuclear attack on Roy. Well, we have worse things to worry about then... :) For these reasons, one may trim out of their holdings if it's overwhelming percentage of their portfolio. But, fundamentally speaking, Iomg appears very undervalued from where I stand...
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