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Technology Stocks : The New QLogic (ANCR) -- Ignore unavailable to you. Want to Upgrade?

To: Craig Stevenson who wrote (13767)	1/20/1998 2:15:00 PM
From: BuzzVA	Read Replies (1) \| Respond to of 29386

Let's assume: Sun award goes to Brocade. Ok, do we revisit $3 again, or is that possibility already priced into ANCR's current stock price, thus allowing ANCR to trend higher on the other OEM opportunities at hand? To me, a realisitic ST downside of $2.00 and a ST upside of $3.00-$10.00 keeps me long in this SPECULATION stock. Anyone have any extra cash laying around they'd let me borrow for 6 months? <g> Just one man's opinion.

To: Craig Stevenson who wrote (13767)	1/21/1998 8:50:00 PM
From: ronald rollins	Read Replies (4) \| Respond to of 29386

I received the following from a guy who's done some work valuing networking companies but doesn't know a ton about what might be safe assumptions for Ancor . I offer it for comment on assumptions or analysis. ------------------------------------------------------------ 1998 1999 2000 2001 FC Switch Mkt Size 250 500 1,000 1,500 Ancor's Mkt Share* 15% 20% 20% 20% * Sensitivity of this is done later on. Implied Ancor Revenues 38 100 200 300 Ancor's Gross Margin 50.0% 55.0% 55.0% 55.0% {Assumed some operating leverage in 1998 and 1999 but then competition offsets additional leverage so margins are flat.} SG&A & R&D {% of sales} 45.0% 40.0% 36.0% 33.0% Operating Margin 5.0% 15.0% 19.0% 22.0% Operating Income 1.9 15.0 38.0 66.0 Tax Rate 35.0% 35.0% 35.0% 35.0% {Likely off due to tax loss carry-forwards, but I don't have that information here.} Net Income 1.4 10.1 25.4 44.0 Shares for EPS 16.2 19.6 21.2 21.7 {This was the # required to fund this level of growth without any debt (which is not an option for ANCR).} EPS $0.09 $0.52 $1.20 $2.03 ----- ----- ----- ----- EPS growth rate 492.1% 131.8% 69.3% Using all of the same margin assumptions, but changing the market share estimate to 10% and share count to adjust for less growth/working capital to fund, yields the following: 1998 1999 2000 2001 Ancor's Mkt Share 7.5% 10% 10% 10% Implied Ancor Revenues 19 50 100 150 Net Income 0.9 5.3 13.2 22.9 Shares for EPS 13.6 16.0 17.3 17.8 EPS $0.06 $0.33 $0.76 $1.28 ----- ----- ----- ----- EPS growth rate 418.7% 128.3% 68.8% And finally for a more optimistic scenario... 1998 1999 2000 2001 Ancor's Mkt Share 20% 40% 40% 40% Implied Ancor Revenues 50 200 400 600 Net Income 1.8 19.9 50.3 87.2 Shares for EPS 18.0 24.6 26.8 27.3 EPS $0.10 $0.81 $1.88 $3.19 ----- ----- ----- ----- EPS growth rate 706.5% 132.6% 70.0% At this point Ancor's stock has a few things going for it, particularly fantastic EPS growth and more growth probable in coming years. However, remembering that Ancor's growth will likely slow considerably from the 68%-70% level, and it is only a one product company and subject to potential technological obsolescence, a fairly conservative P/E might be 32x forward (2001) earnings in early 2001 (this also accounts for a somewhat cooled-off overall market). With this we arrive at the following January 2001 price targets: Market 2001 1/01 1/01 1/01 Price to Share EPS Price Shares Market Cap (millions)2000 Sales 10% $1.28 $41 17.3 $709 7.1x 20% $2.03 $65 21.2 $1,377 6.9x 40% 3.19 $102.1 27.3 $2,787 7.0x Holding margins constant dictates that the price to sales will be roughly the same regardless of the market share estimate; however , I included this measure to demonstrate that this is certainly a feasible value. When Ascend (ASND) was hot it was selling at up to 25x its last 12 months' sales, so roughly 7x is not unreasonable. I think it's interesting to note how dilution is not always a bad thing. In the 40% market share scenario, Ancor is forced to issue far more stock to fund its working capital needs as its sales explode. However, dilution with a purpose can pay off handsomely. This is true despite the fact that the model sells these shares at a higher price than the stock sold in the 10% share case (1999 stock price of $44/sh for 40% mkt share vs. $24/sh for 10% mkt share). While stockholders generally don't like to see additional offerings, this is going to have a rather limited effect on the long term value of the current shares. To arrive at a fair value, these January 2001 stock prices must be discounted back to January 1998. This investment is very much like that of a venture capital play, which might be discounted back by as much as 50% annually. This yields the following current values: Market 1/98 Discounted Share Price 3 yrs @ 50% 10% $41 $12.15 20% $65 $19.26 40% $102.1 $30.25 One might then take a blend of fair values based on an equal chance that Ancor captures 0%, 10%, 20% and 40% of the FC switch market (assumes ANCR is worthless if 0% of market is captured): Value = 0 * 0.25 + 12.15 * 0.25 + 19.26 * 0.25 + 30.25 * 0.25 = $15.42 Granted this whole analysis is rather rudimentary, but the short term (i.e. 1998) numbers are especially uninformed guesses and might be well off of actuals. However, financial performance in 1998 is obviously not what is going to make Ancor's stock take off and keep it going higher. The keys here are the market size, market share, and gross and operating margin estimates in 2000 and 2001. But under any of the likely market share scenarios, ANCR is looking pretty cheap right now.