Tuesday, May 26, 2015

Market Treatment of High Growth

What CAN happen in a market.

This isn't a prediction. It's all my opinion, you decide whether to take it or leave it.

It is perhaps a study of why it may be foolish to make predictions. As we get closer to product releases, considering what might happen with MicroVision shares, the "how high could they go?" question gets more and more difficult to answer. I'm sure the shares will go higher. 

I'm sure the product will get vast public appeal. (EVERYONE I've showed the PicoAir to has wanted it. Not most of the people - EVERYONE.) I really enjoy using it, and I know that in the US... this is a cool toy, elsewhere, much more than that.

In China, Malaysia and India, PicoP technology will be a way for regular people to enjoy media how rich people in the US do. And in India the need for PicoP is huge.

Screen shortage in India

SO, what happens when the investing public's imagination catches fire about a product or anything that grows quickly?

The stock price goes insane. I like to be conservative with estimates, but what if the other investors who find this aren't conservative. (If you're reading this close to its publication date, you are WAY ahead of the normal investor -- PicoP, at this point is almost totally unknown.)

Shake Shack

Shake Shack is a recent IPO. People like their food. Investors like their stock -- probably a little too much.

As of 5/26/2015 at noon eastern time, SHAK is trading at 85.45 with a Price/earnings ratio of 1,225. For each dollar of SHAK earnings, investors are paying $1,225.*

To make this further understandable, Shake Shak has 63 locations. If we divide their market capitalization (3.01 Billion) into those 63 location, we have the value of each restaurant. Each restaurant is [over]valued by the market at 47.7 MILLION dollars. Clearly, the market has exceedingly high hopes for this restaurant chain.


So, if a similar situation happened with MicroVision... I'll assume that MicroVision has medium market penetration success, and the same kind of market success that Shake Shack has had... (just to be clear, I'm not suggesting that this will happen, but it can happen, and as an investor, watching for this to happen is a good thing. If the price gets this crazy, the market will have given you a nice opportunity to sell some of your shares at a peak.)

For my exercise I'll assume that during the next year MicroVision collects royalties on 2 million PicoP licenses. My own estimates have been that MicroVision will ultimately collect $12/unit. Further, I'll assume that the cost of goods sold is 40% of that.
(Cost of goods on the parts that MVIS provides is 60% -- I am assuming 40% -- AFTER royalty payments -- which could be considered conservative.)

Assuming that MicroVision earns $12/engine. They pay for the cost of the goods, and their standard cash-burn rate. MicroVision ends up with a $7.2 million annual profit.
($12 million is cash burn & 60% of the remaining 12 million is 7.2 million. )

There are 48.5 million shares of MicroVision outstanding.

$7.2/48.5 = .15 (Earnings / shares outstanding = Earnings per share)

At a normal PE range for a growth company (60-80*earnings) the price range to expect there would be between ($9 - $12/share)

What happens if it hits the public imagination like Shake Shack?

.15 * 1,225 = $183.75/share

Do I expect this to happen? No. CAN it happen? Absolutely.

For fun, I'll run the numbers at a major CE product number: ten million

10,000,000 - 1,000,000 (Standard burn rate)
(9,000,000 * 12) * .6 = 64,800,000

64,800,000/48,500,000 = $1.34 
$1.34 * 1,225 = $1,641

*(At the same time, investors in Apple are paying $16.23 per dollar of Apple earnings, or $14.06 per dollar of Caterpillar earnings.)

*Older price estimate

No comments:

Post a Comment