<<What's your assessment of the situation right now?>>
Management -- Many business schools teach the
idea that there are two types of managers -- the
entrepreneurs and the maintenance guys. The former
love action and are excellent at creating products
and sales. The latter are the detail-oriented types
that focus on margins, inventory management, etc.
You don't want the latter managing your start-up,
and you don't want the former managing your $400
million sales established company. Venture capitalists
know the difference. Do we?
Java -- Cowpland made the bold statement that
without Java Corel is going to lose everything long
term. In these and other statements, he has seemed
to have no real grasp of what his software developers
were really doing with Java. Now that Java is being
cast as the premier niche-player language -- superior
in some respects and inferior in others, Corel's
strategy of porting Windows applications to Java
makes less sense. And no one -- not even Cowpland --
seems to know what to do with this scenario. Even
Oracle -- am I right in thinking they are linking
their new Java productivity suite to their legacy
RDBMS? Some fast mover in this area will blow by
these guys stuck with their legacy customers demanding
continuity on their investment.
Valuation -- When all is said and done, how can
we value Corel? Re: its brand names, let me quote
from Damodaran (NYU finance prof):
"The standard practice of adding on a 'brand name
premium,' often set arbitrarily, to discounted
cash flow value, can lead to erroneous estimates.
Instead, the value of a brand name can be estimated
using the approach that relates profit margins to
price-sales ratios." He goes on to say that the
value of a brand name relates to the price premium
(over its generic competitors) a firm can charge.
The greater the elasticity in this regard, the
greater the value of the brand name. Such firms
owning these true value-added brand names would
return higher profit margins than others. In
cases where there is intense pricing competition
among the brand names, the value of the lesser brand
name will shrink along with the profit margins.
It would appear from analyzing the pricing and
margins that Corel's brand names are of significantly
less value than Microsoft's. Further, it calls into
question who the truly generic players are here.
Investment worthiness -- One should expect high
volatility in the shares, as the emotional load
carried in them is tremendous. Not unlike Apple.
I doubt the market is inefficient in these shares --
they are valued where the general market psychology
values the company. No one is ignoring the news
and everyone has heard it. In such cases, only those
who can tolerate tremendous short-midterm volatility
and who have a clear advantage over the crowd
on understanding the company's future growth should buy and
hold (or short and hold - depending on marginability).
This ain't me, so I remain on the sidelines with little
compelling reason to buy.
Good investing,
Michael Burry
sealpoint.com |
