The Bubble Valuation Model
TAVA is priced as if growth will continue into the foreseeable future, but the reality is the Company has under two years to generate sufficient Free Cash Flow (FCF) to justify their market cap. This is a classic "bubble" opportunity; where a Company enjoys extraordinary revenues (and profits) for a short period.
Bubble vs. Growth
In the '70s, a friend of mine had a small RF consulting company with revenues of $300K per year. Along came the FAA mandate that all private planes must have an ELT (Emergency Locator Transmitter) retrofitted within two years! My friend's company introduced an ELT and enjoyed revenues of $3M for two years ... and then returned to $300K per year.
What was the value of his company? He grew 10 fold in one year! Wow! And earnings went from about $30K to $500K - again in one year. Priced as a growth company (like TAVA), his company would have been worth in excess of $100M! He should have sold<G>!
Instead, his company should have been priced as a "bubble" company. Take the value of the $300K per year consulting company (not much) and add about $1M in profits for the bubble opportunity.
Maximum TAVA Valuation
Lets use this same model on TAVA - and make some very aggressive assumptions about revenues - and see what the value of TAVA should be. Jenkins has suggested that TAVA may book $25M in Y2K work for the next several quarters. Lets be generous and say the Company receives $25M in revenue for the each of the next 6 quarters. The core business is losing money ... so lets ignore it for the purposes of FCF.
Now $25M per quarter X 6 quarters = $150M in revenues. Wow! (IMO this is way too high, but we are trying to estimate the maximum value of TAVA). With net margins of 40% (again way too high), and a tax rate of 35%, this gives a profit of $39M!
Now, what is the value of the core business? Revenues are declining, margins are thin, and the Company is losing money. An estimate of $25M is probably way too high ... so lets use $40M and be very generous! This gives a total valuation of $79M for TAVA. Using this model, with approximately 25M shares outstanding, the maximum value for TAVA is $3.16.
Regards, Bill |
