So how much will the shares of Net Shepherd appreciate in value?
I spent the past few days reviewing my notes and hammering away on a calculator. I did this with the intention of determining a forward looking target price for the shares of Net Shepherd. As a result, I pulled together some calculations which I think present both a best and a worst case scenario.
If my best case scenario holds true, and the company achieves its stated objectives, then I can see how this company's shares could easily be trading at a range of $70 to $80 dollars (CDN) by mid next year.
When I used more conservative metrics to arrive at a future share price, I found that it is reasonable to expect that the company's shares will be valued at a price that will be not less than $8.33 by mid next year. Despite the significantly lower price, it still represents a 330% increase over NSI's current share price.
Note:
The two variables which play the biggest role in my estimates include the amount of money that the Answers.com will raise in its IPO, and the appropriate Price to Book ratio to use when valuing an Internet company. The two Price to Book valuation numbers I have used are - best case @ 30, and the worst case @ 6.
Here is how I came to this conclusion . . .
Background
(Note: You may have heard this before, but as I believe that it is relevant to this discussion, I have restated it here.)
- NSI has both very strong partner and client lists - Alta Vista, Dunn & Bradstreet, idealab!, etc.. This list is growing stronger.
- NSI has no debt, and has a cash reserve of $2.6 million.
- They are working on a number of "Game Changing" International Pilot projects which could easily translate into significant revenue streams for them in the near future.
- They have applied for a patent dealing with their unique use of technology and a distributed task force.
- They have demonstrated how they can deliver results to paying clients at a rate that is 10 times faster - at a tenth of the cost - and with a higher degree of accuracy than existing research techniques.
- They, and their partners, are at the forefront of the commercial application of XML. This technology will change peoples' paradigms about the Internet.
- NSI has a clear vision for where they are headed ("Road Map") and they are making real progress on building the infrastructure to ensure it is realized.
Plans
NSI has stated that they will be focusing on securing recurring revenue contracts over the coming months. They have undertaken a number of Pilot Projects for which they are now building the infrastructure they need to roll out, and more importantly, replicate these contracts. These are very ambitious plans which have applicability on a world scale.
They are actively assessing other firms with the intention of partnering, or acquiring them.
They are putting the final touches on their "Task Force" Community to ensure that it will remain both vibrant and productive when they exponentially ramp up their workload.
NSI is planning to take both Answers.Com and another Internet Business focused company to the IPO stage within the 8 to 18 months. Answers.com will be first (target date is March 2000), followed by an IPO for the second company.
The Assumptions I have made to arrive at the $70 to $80 share price target.
- NSI will achieve the Revenue targets they have set for themselves
- A price to book ratio of 30 has been used (I am under the understanding that other Internet firms have received this valuation level)
- As NSI is debt free, by year 2000, « of NSI's revenue ($10 million of the $20 million revenue target) will go directly to their bottom line
- Answers.com will be taken to an IPO by March 2000
- There will be 12 million shares issued for the Answers.com IPO
- NSI will retain a 60% ownership position in Answers.com ( + 7 million shares)
- At an issue price of just over $8 a share, the Answers.com valuation will be $100 million (US) [$100 million (US) divided by 12 million shares issued = $8.33 (US) share issue price for the IPO] Note: This price does not account for any price appreciation that may occur beyond the IPO issue price.
- Over the course of the coming 8 months, and in order to complete necessary acquisitions, etc., NSI would expand their total outstanding share count to 40 million shares.
How the $70 to $80 valuation was determined
- $100 million (US) realization from the Answers.com IPO (12 million shares @ $8.30 share)
- NSI's retained 60% ownership of Answers.com = $60 million (US)
- $60 million (US) @ $1.5 conversion factor = $90 million (CDN))
- $90 million + $10 million (NSI's cash reserves based on yr. 2000 revenue) = $100 million (CDN)
- $100 million divided by the estimated 40 million NSI outstanding shares = a book value of $2.50 per NSI share
- With a price to book ratio of 30 x's the book value of $2.50 per NSI share = a share price of $75 (CDN)
More Conservative Projections and Estimates
As mentioned in the introduction to this post, the two variables that play a big role in my estimates include the amount of money that the Answers.com will raise in its IPO, and the appropriate Price to Book ratio. In order to provide what would be considered a much more conservative estimate, I will re-work my calculations using the following changes to the model.
If the Answers.com IPO only provides NSI with one half of the $90 million (CDN) I have included above, then this would provide NSI with an Answers.com ownership value of $45 million (CDN).
I have changed the Price to Book valuation numbers to a more traditional 6 times valuation.
Conservative Calculations
- $50 million (US) realization from the Answers.com IPO (12 million shares @ $4.15 share)
- NSI's retained 60% ownership of Answers.com = $30 million (US)
- $30 million (US) @ $1.5 conversion factor = $45 million (CDN))
- $45 million + $10 million (NSI's cash reserves based on yr. 2000 revenue) = $55 million (CDN)
- $55 million divided by the estimated 40 million NSI outstanding shares = a book value of $1.39 per NSI share
- With a price to book ratio of 6 x's the book value of $1.39 per NSI share = a share price of $8.33 (CDN)
Comments
In my opinion, Price to book value is just a snapshot of the value of a company during a short window (such as immediately following a spun off IPO listing). To determine a company's forward looking value of their stock price, an investor should base their projections on their current earnings, and their potential for earnings in the future. As the infrastructure for both NSI and Answers.com becomes more established, and their customer base grows in the coming months, we will be in a better position to project revenues in the period after the IPO. Answers.com will be supported by NSI's proven technology and community research tools. They will be able to conduct faster, more effective researches for their clients than Ask Jeeves will be able to. Given Ask Jeeves current model, Answers.com will also be incurring a much lower operating cost than Ask Jeeves.
I believe that the IPO market next summer will still be favourable for those companies who have a proven technological, speed, and cost advantage. This is exactly how I believe that Answers.com will be perceived.
As a follow up to their Answers.com IPO, NSI's is planning to bring out a second IPO for their new Internet to Business company. Should this IPO also be received favourably, then in my opinion, NSI could see an additional 50 to 100% contribution to their significantly increased book value.
Should the IPO market cool, and the Answers.com IPO price only reach a value of 50 % of the expected price, then my conservative my calculations will come into play. These totals would still provides NSI investors with a share price of $8.33.
Summary
If I am correct in my calculations, then I believe it will not take long before the investment community begins to understand this company's potential. As a result, I believe we can fully expect to see a dramatic increase in NSI's share value over the next few months. I also expect to see the shares hit these targets within the next 8 to 12 months. Now, if my first more optimistic estimates prove true, then the appreciation of share value will be exponential in its scale.
I have presented this information in order to initiate some debate as to the potential return on our investment in this company. I do not want to be seen as hyping the stock, nor do I want to mislead others. This is why I have posted what I consider to be the range of possibilities in the share price. So on that note, if you do see some flaws in my reasoning and/or calculations, please let me know. I also recognize that many other factors may come into play which may affect these projections either up or down.
When I began to recognize the potential within this company, I began to dig much deeper into their plans for the future. This is the primary reason I chose to fly to their HO to interview members of their management team. I had the good fortune of working closely with Denise D. and Barry K. to conduct these interview. We all felt that it was important to see for ourselves just what this company is all about. I am confident that both Denise and Barry feel as I do, in that NSI has (or will very soon have) the ability to make their stated Road Map a reality.
I am both excited, and confident in my investment in Net Shepherd, and I look forward to any comments or input anyone chooses to offer.
Crazy Canuk |
