Hi, I've been mulling further on the valuation of AFS.
Let's say AFS is successful in selling 10,000 Sparrow systems to Mexico next fiscal year. This gives a revenue of $20mill. In order to finance this kind of growth, AFS will have to do a large share issue... say, 5 mill shares. Add this to the 25 mill shares now o/s, and assuming 7.5 x revenue, the market value calculation is $5/shr.
This is using 7.5 x revenue, which IMO is way, way, optmistic. For example, if we apply this multiple to Dell which has 700 million shares and 20 billion sales, and a business growing over 50% a year, Dell's stock price should be priced at $215 per share today, instead of $70!
By using 5x revenue for AFT, which is still an optimistic valuation, it translates to $3.35 per share based on $20 million revenue. A more down to earth, but still fairly rich valuation, would be 2x revenue, and this translates to $1.35 per share, based again, on a $20 mill revenue.
AFS reminds me of International Verifact (IVI/TSE - manufacturer of Interac electronic payment gadgets - the gizmo you use to pay for groceries at the supermarket.). 4 years ago, IVI grabbed the imagination of many investors as a micro-cap company with an exciting technology which was in sync with the "new world". During the frenzy trading period, the stock soared to $4 even though its revenue was small. Then, like most micro-cap stocks, IVI then went through a long ordeal of growing up - balancing many balls in the air - research & development, manufacturing, financing, managing, and marketing - and in the meantime, the stock price drifted down to pennies per share. Two years ago, IVI consolidated the stock 10:1 to bring the price above $5/shr to qualify for institutional buying. My 1000 shrs, purchased years ago at $2 (which I thought was a real bargain then) shrunk to 100 shrs. If you had bought the stock at $4 before, it is equivalent to $40 of today's stock.
IVI is now trading around $10.50, and has bright prospects. It is my favourite small cap stock. I've been buying more on dips. This month it'll be merging with Checkmate to form a company which will be 3rd largest in the electronic payment industry, $120 million in sales, great product lines, no debt, $16 million in cash&marketable securities, marketing alliances in Europe and Latin America, major industry player in North America (supplier to large banks and retailers), eps of 42 cents this year, and 60 cents estimated for next year And, the stock is trading at a reasonable price. On top of all this, there is a good probability IVI could be taken over by Ingenico or one of its bigger competitors! If we were to apply the same valuation criteria of AFS (7.5 x revenue) to IVI, with 14.2 million shares, the stock should be trading at $63 ! Get the drift? BTW, if anyone is interested in discussing IVI, there is a thread (IVAF) on SI.
I'm probably talking to someone who knows more about these things than me. From the word "client" I guess you're a broker?
regards
d |
