FWIW, I'm initiating a position in SEBL and hope to accumulate quite a few shares. Short term there could be more downside, but long term this looks like an opportunity to me.
PE is a false indicator of valuation in this case, IMO. But let's take a quick look at it anyway. First of all, the forward PE isn't 120 it's actually much closer to 60. The following link to the Nasdaq site shows that EPS forecasts are for 0.73 for FY2001 and 0.99 for FY2002. That's a forward PE for FY2001 of 65 and a forward PE of 48 for FY2002. That's not bad for the absolute clear leader in the CRM market and a standout in other markets as well. With the incredible level of growth expected in both the company and the CRM market this valuation looks compelling. Similar to MSFT in the late '80s and early '90s. You do need to pay a high premium for a company that is so clearly a leader in a growing industry, IMO.
earnings.nasdaq.com
Next, I'd argue that SEBL's PE isn't nearly as relevant as its PS (price to sales ratio). It's trailing PS ratio sits at about 11 and its forward PS is much lower. This is a very reasonable PS for a growing software company. Software is a high margin business. Very high margin when your products are popular, as SEBL's are. ORCL, MSFT and most of the other successful software companies have PS ratios of 10 or higher.
So SEBL looks fairly valued in terms of PS relative to these other companies? Actually, you could argue that it's undervalued by this metric. SEBL is growing MUCH faster than ORCL or MSFT. So, you should pay a higher multiple for a faster growing company. It will rapidly grow into its multiples and then drive the stock higher with continued growth. SEBL is growing about as fast as BEAS. BEAS is another leader in a different segment of the market. It's a good company that has a large phase of growth ahead of it. The problem with BEAS is that it's barely profitable and it has a PS of about 21. Twice as expensive as SEBL.
The reason I like to look at PS instead of PE is that SEBL is still in the early stages of growth. They still invest a large amount of capital in R&D, nurturing partnerships, infrastructure growth, etc. The process of obtaining a large customer base costs money and they are still in this phase of their business plan. Once they are further along, these expenses stabilize while revenue growth continues. The large customer base pays off and margins increase.
Soon, the net margin is higher than today's. The EPS grows faster than revenue and the PE starts to look a lot more reasonable.
My guess is that SEBL grows revenue at about 35 - 40% for the next 5 years and EPS will grow at 50% per year for the next 5 years. If this is the case, SEBL could end up trading at about $150 by 2006 (a 200% gain) and it's PE would be sitting at 30 and it's PS at about 6.
Those metrics are reasonable for a company solidly leading its industry and sitting on a long string of profitable quarters. IMO, that's what you'll see from SEBL over the next few years.
Just my opinion,
Dave
PS. All bets are off if the US economy slides into a depression instead of a recession. That's unlikely, IMO, but nothing can be ruled out. Also, the market is a bit unstable these days, that's why I'm starting to accumulate SEBL, not jump in with both feet. |
