SPAZ: What do you think about this one ?
SPAZ Good Post from RB
Valuation Analysis - $12 by next year
I decided to do a little more due diligence on this stock. The stock appears to have taken a beating when the company was forced to convert many of their contracts to fixed fee licenses because of the need for cash to cover some ill timed product developments. This bump in corporate history appears to be behind them and DVD revenues should be again determined on a license fee per unit basis based on recent press releases. I decided to focus on the DVD market since that seems to be the area where they are achieving the most penetration. First let's look at the 3/31/99 Financials and get some useful information. Gross Margin was over 99% of revenues. Operating expenses and other expense total $354K. Annualized X 4 and increased by 25% (raises, new hires, whatever?) is $1.8M.
Now we need to guess what they are making per unit for each DVD video player manufactured using their technology. An appealing comparison is Gemstar International (GMST). GMST licenses the technology that uses the numeric code published in your TV program guide to record shows on your VCR. Although they operate in a mature market, GMST is trading at about 75 times 3/00 earnings. As recently as 7/15 they were trading at 93 times 3/00 earnings. There is no way determine from their financials what they get per unit shipped (Some of their licenses are flat fee based), but Hoover's says that they receive a fee of a few dollars a unit. To me, a “few dollars” is more than 2 and less than 5. I doubt SPAZ is receiving this much per unit (I could be wrong). In fact, let's just use 75 cents per unit in this analysis to be conservative.
Now we have to determine what part of the DVD player market SPAZ's N-2-2 product is used in. Some of the big names that are absent from their current list of licensees include Sony, Pioneer, and Sharp. Using a somewhat outdated information source, Sony has said it expects to control about 30% of the DVD player market (3/18/99 article on www.techweb.com) Pioneer holds about 15% of the US market and a slightly larger percentage of the worldwide market. Sharp looks to have less than 15% of the market. So let's assume that licensed manufacturers will account for about 40% of the DVD players produced.
Now we have to determine the size of the market. DVD players are becoming more mainstream and their market acceptance in accelerating. Several sources confirm that there will be about 4 million units in homes by the end of 1999 with about 5,000 movie titles available. (7/9/99 article at www.dvdreview.com) Here's the amazing part. Industry officials predict annual sales of DVD players will reach 60 million units in the year 2000 (7/28/99 press release by Matsushita Electric). Note that the Message From the CEO on SPAZ's website predicts that the potential market for 3-D audio (I'm assuming in all sound producing consumer products, while they appear to have a larger penetration in the DVD player market) exceeds 500 million units per year and he believes SPAZ controls about 15-20% of the market. The CEO has told us not to expect too much in the June quarter, but a solid impact on December numbers. Ignoring what results for 1999 will be and just looking ahead to 2000, if we take 60 million units X 40% X $.75 = $18M X 99% = 17.8 less $1.8M of cost = $16M less tax at 34% = $10.6M of net income. With 27.4 million shares outstanding, that's $.39 per share. A 30 PE yields a stock price of $11.70. This is just the impact of income from their N-2-2 technology on DVD players. SPAZ has other technologies and also licenses to computer manufacturers and many other consumer audio products. They just entered the exciting MP-3 market.
You can substitute whatever numbers you want in the above analysis to determine your estimate. Using the 500 million units in the CEO message, the 20% market share, $.75 per unit, and a low 30 PE, you get a stock price of over $52. This stock has the potential to make a significant move based on the outlook for their products even if the assumptions in the previous paragraph are overstated. And their momentum in new licensee wins seems to be accelerating. IMHO, an investor willing to hold this stock for a reasonable period of time stands to profit handsomely based on today's price level.
Good Investing
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