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

To: mark cox who wrote (8635)	11/28/1999 12:10:00 PM
From: Kenneth M. Koff, CPCU	Respond to of 18366

Mark, how formidable is EDIG's competition? (If discussed in a prior "post", please refer me to it...) Many thanks! Ken Koff

To: mark cox who wrote (8635)	11/28/1999 1:49:00 PM
From: JimC1997	Read Replies (1) \| Respond to of 18366

Mark, Interesting analysis but perhaps a bit optimistic in the near term. I think it will take longer than a quarter to gear up production and ship the 300,000 units you use in your assumptions. Also, the selling price of the branding firm would not be the revenue to e.Digital. The wholesale selling price would be factored down by the branding firm's gross margin, then by the amount of production cost (if any) that was paid for by that firm. But longer term, I agree that e.Digital has the opportunity to capture the majority of the portable music player market - at least in terms of design. How that translates into revenues and how long that domination lasts is one of the key issues for investors, along with how the company takes advantage of that position to evolve into a larger entity. The working capital needs would be significant, but e.Digital could finance them in various ways. The easiest is what you suggest, that Eltech (or whatever contract manufacturer was used) would simply change the costs upon delivery. As production grows, however, it is likely that they would want some guarantee of payment or cash upfront. Letters of credit could be used, but these require a substantial line of credit, which e.Digital currently does not have. Most likely the OEM would guarantee payment or extend payment advances. As e.Digital grows it will need to establish its own credit facilities, but bankers are pretty conservative and would want to see some operating history before risking a line on such a small company. Regarding the market cap issue, obviously opinion is based upon one's own perceptions of the future cash flows of the company and the equity markets valuation of those cash flows. For rapidly growing companies the market looks further ahead than the current year or the next in assessing value. Price to sales ratios are valid for comparing stable companies in the same industry, but for companies experiencing extraordinary growth rates (e.g., the sub-$1 million to $50 million + growth in your assumptions for e.Digital) the PSR will not be comparable to any other company. To determine a reasonable price-to-sales ratio you must make assumptions about the ultimate size of the company when the grow rate "slows" to 20% - 30% per year. For example, if the equity market perception is that e.Digital will become a billion dollar revenue-producing company, the price to sales ratio in the near future will reflect that long-term expectation and PSRs of 20 or greater would be obtained in the near-term. That is the only rational explanation for the equity values achieved by the internet stocks or firms such as InterTrust. JimC