Lazarus Long DGIV Evaluation (8 of 8):
Summary and Conclusion:
Discussion: Digitcom is engaged in an emerging industry with experts expecting exponential growth. The industry has the advantage of not having to establish a long distance market, but rather only convincing them of the advantages inherent with IP Telephony. Price will be the driver. Great strides have been made in recent months to overcome technical challenges and there is no reason to assume additional progress will not be made.
Digitcom's strategy of engaging countries and local telephone companies as partners is not only sound, but perfectly suited to enhance their corporate strengths and minimize their weaknesses. They have chosen to pursue the most lucrative of the long distance market: international calling.
Competition, at this point seems to be having no negative impact on Digitcom's ability to generate contracts. Perhaps the greatest shareholder risk from competition, in the near term, is a hostile takeover (presumably since management is rumored to not desire a sale of the company in the short term) that would not allow Digitcom to reach full appreciation or fulfill its potential.
Management believes in the company. There have been no significant disclosures of inside selling this year. The float remains small: 6-7M shares, as does the number outstanding: ~20M shares. ~100M shares are authorized.
IP Telephony revenues are scheduled to start in the 3rd quarter from contracts signed earlier this year. Rumors abound about additional substantial contracts, new countries that have been added as clients, additional infrastructure authorized and commissioned and sources of capital and institutional investor interest.
There has been no discernible progress toward a NASDAQ listing, though the company has stated this as a goal. Requirements have not been met to date, including the filing of required documents. The fact that the company trades on the OTC market introduces price risk to the shareholders. Lack of current information on the company also substantially increases the perceived risk to the shareholders. Lastly, management credibility has been damaged by failing to comply with self-imposed deadlines on releasing the 10-SB and financial reports; although, shareholders are so satisfied with management in all areas that this transgression is likely to be forgotten once the documents have been filed. Furthermore, the company has indicated, via a recent Press Release, that the 10-SB would be released before a trade show taking place in New York on September 23 -25... employees would be on hand to "answer inquiries from Wall Street that may follow from the company's 10-SB filing with the SEC."
Digitcom's participation in the show seems to indicate a willingness of management to start making Digitcom more visible to the investing and IP Telephony world. This would be consistent with their desire to get the required documentation for NASDAQ listing filed.
It is clear that Digitcom was grossly overvalued upon initial purchase. The current price would predicate a multiplier of almost 150 on last year's earnings of $.02 per share. Clearly, shareholders are expecting a much improved performance in 1998. In fact, a previous analysis I did based on announced contracts and a multiplier of 20 on revenues and 50 on earnings indicated a share price of $10 - 12 as fair valuation. Even at multipliers reduced by 2, current pricing indicates an underpriced condition. However, it is expected that announced contracts are not the only current source of revenue and Digitcom's rapid growth plan and its execution indicate that share price appreciation is likely over at least the intermediate term.
Conclusion: Digitcom is an underpriced stock that has huge potential in both the intermediate and long term. A combination of risk factors due to lack of information and being traded in the OTC market have combined to increase volatility and discount the stock. Removal of many of the unkowns, as is expected shortly, will tend to decrease volatility and reduce the risk discount. Further price appreciation is expected through the announcement of contracts already obtained and future revenue growth, regardless of general market conditions.
Digitcom shares may experience some price resistance (on the way up) at $4 - 5, as recent purchasers of lower priced shares take some profits.
Decision: If no present holdings, take an intermediate position until the 10-SB is filed. If analysis of the 10-SB and current stock price so warrants, take a full position. Translated to current position: Hold and update the evaluation upon 10-SB filing and / or September 25, whichever comes first. |
