Hueyone, I just disagree with one of your points. If SEBL can't reward its employees with stock options that are worth anything then neither can the other IT companies so where can these bright people go? Nowhere, so they'll just stay put . As for your proof that SEBL wasn't getting a net positive cash flow without stock option related cash receipts, let me at least temporarily completely accept that(until and unless some very experienced accountant shows any flaw in your argument, which I certainly can't see now). So SEBL doesn't now make profits.
I consider SEBL moderately overpriced now; I said my metrics recommended selling at 42-43. But there is a strong bullish case to be made also. Let me make it. They are the acknowledged leader in their field. They simply have by far the best software. Having built the best, sooner or later they can charge a fancy price for it. The best is worth more. As far as losing money in the beginning or only breaking even after several years, that goes with the territory. It isn't cheap to get the programming just right. It isn't easy to know the customer's requirements in great detail and amaze them with your program that satisfies their detailed requirements and then some.
Being the leader in its field, the gorilla, SEBL will attract other good but smaller companies in related fields to merge with it, increasing its power. I think it's not unreasonable to think that they can after not too long a while make 10% profit on sales. At the end of March there were 453 million shares outstanding. Assuming two billion sales, they actually had
588 million sales in the first quarter, we get a potential 44 cents profit.
Let's suppose that the profits per share grow by 25% a year for the next decade. That also seems reasonable. CISCO, DELL, INTC, all did even better than this. Worldwide, the CRM area will be very important for all mid size and large corporations. This gives us about $4 per share of profits ten years hence. Suppose the shares sell for 40 times earnings then. That gives us a price then of 160. How sure are we then of achieving this near quadrupling of price in ten years, i.e. 15% per annum? Not 100% sure? Then we should seek a, let's say, five fold growth of our investment. That means we wait for a price of about 32. Usually I like to compare the P/E with that of money but you indicate that E is zero, so we can't do that meaningfully. In the software business you lose money on the first thousands of copies or the first few hundred systems you sell, Finally, when the development expenses subside the money really rolls in because there are few costs associated with the sale. The buyer has friends who use the program or system; there is momentum. My 10% on sales is really conservative.
I'd like to emphasize that my evaluation system has not been tested. It arose out of the flames which burned people like me who thought the hypergrowth was permanent. |
