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Technology Stocks : Network Associates (NET) -- Ignore unavailable to you. Want to Upgrade?

To: Just_Observing who wrote (4819)	4/7/1999 11:32:00 PM
From: AlienTech	Read Replies (2) \| Respond to of 6021

Like higher plane said, some things to consider. SYMC might be takign some of the customers while NETA is in transition and straightning things out. But can they keep it up? Obviously, the CEO does makes a difference. 1. The SEC has signed off on the company's accounting. They made NETA change the treatment of in-process R&D, and we all know the magnitude of the 1999 earnings impact (6 cents/qtr) from this additional non-cash amortization. The analysts have revised EPS estimates to reflect this issue. But the SEC DID NOT have any objections to things like revenue recognition, deferred revenues, accounts receivable, or any reserves. That's important, because the shorts have always harped on these issues. The AUDITED 10-K and 10-Qs will be filed next week. 2. The company has $734 million of cash and securities on the balance sheet. Yes, there is debt, but the company is also generating positive cash flow -- just look at the change in the cash position from Q3 to Q4 (cash and marketable securities increased from $640.6 million to $733.8). And that's despite DSO's increasing. What are the uses of this cash? Well, they could make more acquisitions. But Larson has said that acquisitions will no longer be the focus of the company -- they have acquired all he different elements of the product suite that they wanted to build. And on Monday they announced the updated versions of the suite of products. Rather, I think the company will announce a nice stock buyback. At $16, NETA could buyback 20 million shares with 1/2 its cash. 3. What happens if NETA announces that it is taking McAfee.com public? Has anyone paid attention to the internet (I mean, internut) stocks lately? And McAfee.com actually has revenues. What do you think it's worth? $1 billion? More? Every internet IPO these days is getting valuations that would make your head spin. My point is that if McAfee.com did go public, there is a HUGE undervaluation of the core business. And you can bet management is considering it. 4. The key question is this: how much of NETA's Q1 slowdown is due to the Y2K lockdown, and how much is due to a product transition issue (since they just released new versions of all the products). Here's my point. If I were a corporate customer looking to buy some NETA products in Q1, knowing that new versions of the products were coming in Q2, what would I do? I would either demand a hefty discount on the old products (hence, price pressure), or I would hold off on my purchase until Q2 when the new products were available. Either way, NETA's revenues would be adversely impacted. But this product transition phenomenon is temporary -- it should get resolved once the new products are available (and they were introduced on Monday). 5. So let's look at the valuation at $16. There are 150 million shares o/s, so the market cap is about $2.4 billion. Sales are running about $1.1 billion, EBITDA this year will be about $275 million, and revised operaing earnings are about $1.60 - 1.70. So, the stock is trading at under 2.5x sales, 10x EBITDA, and 10x earnings. I don't care what anyone says, that's value. No company that has the market opportunity (in terms of the network security software market's long-term growth rate) of NETA has such a low valuation. Sure, ISS, Secure Computing, and Axent are "cheap" security software players, but their market shares and market caps are dwarfed by NETA. It's rare that you ever get the chance to buy the market share leader in a fast-growth industry at these multiples. 6. The stock at 16 reflects a view by the market that the demand for security software will be lower in perpetuity (as opposed to a temporary slowdown due to Y2K or product transition issues). There will never be another Melissa virus. There will never be any more hacker attacks on corporate networks. And there will be no need for corporations to secure their networks. That view of the world is ridiculous. If you believe in the need for network security software, you HAVE to own NETA, because it's the Microsoft or Cisco of its industry.