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Technology Stocks : WAVX Anyone? -- Ignore unavailable to you. Want to Upgrade?

To: Norman Klein who wrote (8070)	7/9/1999 4:02:00 PM
From: Norman Klein	Read Replies (1) \| Respond to of 11417

Pacific Growth Report (Page 3) equity research Steve Olson 3 Wave Systems Corp. (415) 274-6880 WAVX:Nasdaq solson@pacgrow.com Strong Buy Deployment Initiatives are the Key Driver for 2H99 Looking at Wave's business model, we believe that several key pieces are in place. Wave has significant agreements on the technology, security/applications, and content fronts (see table below). OEM deployment is now the key driver in our opinion. Over the next several months, we expect the Company to put relationships in place that will further define the deployment scope and timetable. Possible partners include chip companies, PC and PC peripheral vendors, set-top box vendors, ISPs, and broadcast companies. We anticipate that these relationships will support large-scale deployment projections over the next 18 months and beyond. Wave intends to subsidize the hardware deployment at a cost of $5-8 per chip, thus eliminating the implementation cost for OEMs. The goal is to build a multi-million user network to which the Company's can deliver its Wave Direct software service as well as other content, networking, and transaction services from Wave and from third parties. The primary service, Wave Direct, opens a new distribution channel for consumer software. Wave has agreements with several content providers, including Electronic Arts, GT Interactive, and Cendant, who are attracted to Wave Direct due to its flexible pricing models and direct contact with consumers while realizing margins that are similar or better than retail. Wave's Web of Partners OEMs Technology Security/Applications Content Hauppague Digital Actiontec ITE Standard MicroSystems Oki IGST Atmel Sarnoff Fantastic WavePhore Sigma Designs HP VerSecure RSA VeriSign Aladdin Sun/JavaSoft Pollex GT Interactive Cendant Headbone Interactive McGraw-Hill Psygnosis Ltd Red Storm Entertainment Valuation and Recommendation We are initiating coverage of Wave Systems with a Strong Buy rating and a year-end price target of $32. Given that Wave's goal is to build a large network of revenue-generating users, we approach valuation on a per-user basis. Enterprise valuation per user for our comparable group of Internet and cable companies range from a low of $387 for Excite and a high of $4,400 per user for AOL, with the cable companies in the middle of the range. The per-user valuations are significantly correlated with revenue per user, with Excite generating $2.97 per quarter and AOL generating $30.48. The key variable to our valuation analysis is deployment; we assume that Wave will have 788,000 active customers by year-end 2000 and 4.7 million by 2001. Our model assumes that Wave generates $15.92 per quarter per user. For valuation purposes, we are applying the low end of the per-user valuation range to derive our price target. As Wave's revenue model is proven, we believe that the per-user valuation should rise accordingly. Wave Projected Valuation Range Value per user Enterprise Value YE01 Share Value YE99 Share Value $500 $2,369,101 $58 $32 $750 $3,553,652 $86 $47 $1,000 $4,738,202 $115 $63 Assumptions: YE2001 Active Users (mm): 4,738 Monthly Revenue per User: $5.31 Shares Outstanding YE01 (mm): 41,143 Discount Rate: 35%