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Technology Stocks : e.Digital Corporation(EDIG) - Embedded Digital Technology -- Ignore unavailable to you. Want to Upgrade?

To: $Mogul who wrote (7804)	9/21/1999 8:05:00 PM
From: JimC1997	Read Replies (2) \| Respond to of 18366

EDIG is always going to be "tough to sell" because new developments will offer the tantalizing promise to increase its value more than any other stock in your portfolio. I decided to speculate on the possible market value of e.Digital over the next month as news is released. Here are my thoughts: Right now we have a stock with only about $10 million in confirmed annual revenue (the Lanier contract annualized) and a lot of speculation. I believe, (with the usual IMHO caveats) that over the next few months that revenue potential will likely jump to $100 million or more, depending upon the number of music player contracts announced. I believe that an equilibrium value for e.Digital with only the Lanier contract is about $2/share, assuming a high rate of growth for the Lanier business. That product line has a gross margin of about 30% currently and an expected growth rate of at least 50% per year for at least the next four years. To calculate the equilibrium market value associated with the Lanier business, consider the growth in revenue over the next four years, at a 50% per year growth rate. This leads to a revenue estimate of $50 million and, at 30% margins, earnings of $15 million or approximately $0.15/share. Take a conservative P/E of 25 for four years from now and the stock price would be $3.75/share at that time. Discount that by 17% per year to reflect expected average market performance over that time period (that is about what the average S&P gain has been over the past twenty years) and the current value is $2/share. The music player market will be much larger, but probably quite a bit lower in margins -- more likely in the 15% range -- so the value of the revenue is obviously lower. Another key factor is the probable growth rate and length of time that the revenue stream growth will exceed normal economic growth rates. Let's assume that music player growth prospects are similar to the Lanier business. Good arguments could be made on both sides of the issue (higher growth rates due to the big consumer markets available vs. lower growth rates due to the influence of competition). Taking the middle ground, the music player product sector is thus worth about five times that of the Lanier business. This would add about $10 to the company's market value. (Revenue in four years would be $500 million; margin @15% yields $75 million earnings or about $0.75/share. 25 P/E on this gives a value of $18.75/share. Discounting 4 years back to today @17% gives a present value of $10/share.) Then there are the Intel-related products to consider, about which we know so little that no market value can be guessed-at (for now!) And, of course, lots of speculation about other markets could be added to the mix. These could easily lift the valuation substantially above my estimates. (And I know that I am ignoring plenty of other factors like the cost of ramping up the organization to manage a $500+ million business, capital needs, etc., etc. But this is just a rough guess to fill the time until we hear some real news.) Anyway, the music player and medical markets account for a $12 stock by my crude guestimation approach. When news hits the market usually over-reacts as it tries to assess the value of the news. A fair guess is about 33% at the peak, so the stock should peak at $16 upon news, then fluctuate around the $12 equilibrium value, dropping to a low of perhaps $6 on a severe reverse reaction. Why would this be the bottom? If the news suggests that revenue would be $100 million (as I suspect), and the marginal profit rate is 15%, then the EPS would be about $0.18/share ($0.03 from Lanier, $0.15 from the music players). The market would probably assign a P/E of no less than 33, so the minimum price would be $6.00. Another way to consider valuation would be on a multiple of revenue approach, and $6/share would be about 5X revenue per share -- a low value for a stock with e.Digital's growth prospects. Keep in mind that my guess of the "low" implies that the market would pay essentially nothing for e.Digital's growth prospects. Obviously this condition would not last long and the stock should quickly rebound from that level back towards the $12 range. Well, that's my basis for hanging on to the stock and why I am looking for $16 in the near-term. What do you think?