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By Bruce Jackson (TMFGoogly)
Baker Street, London -- I've some more disturbing news to report. Having announced a week ago Monday that I was buying more Misys (LSE: MSY) shares because the price had fallen to 470p, I promptly failed to buy them at that price. Instead, like a klutz, I waited and waited until the last possible moment, before eventually buying 194 new shares at 524.25p. That was a full 11.5% above my target price. If I'm aiming for 15% appreciation per annum with each individual company, that takes a big chunk of potential gains out of the equation. One day I'll learn!
The Misys share price has continued to tear forward, because of
Ummm, err
No reason at all, really. Yesterday I spend 20 minutes in front of the Fool's Bloomberg, trying to swat up on digital radio developments. The Qualiport's media company Emap (LSE: EMA) has some radio interests -- maybe that's why their share price rose 3.7% today. Anyway, whilst listening to the people at GWR (LSE: GWG) talk about this new technology, I found myself staring at the sea of blue and red numbers which made up the entire FTSE 100 index. Share prices were changing by the second. But why? There was no news driving the individual share prices, so it must have been down simply to the forces of supply and demand.
Presumably some investors think Lloyds TSB (LSE: LLOY) are a buy at about 840p, and others think it's a sell. Because share valuation is subjective, this scenario is quite possible. However, this short-term share volatility is much more likely the result of traders trying to time individual buys or sells, something I've proven is impossible -- see Misys above!
This has been said plenty of times before, but is worth reminding Fools of its importance. In the short-term, the share price of a company will usually move completely independently of the under-lying performance of the company. This is what Benjamin Graham and Warren Buffett have said in the past, and they are great investors with supreme investing records.
On that note, I'll move forward, but not before pointing you to this excellent article titled "Mr. Buffett on the Stock Market".
On Monday I started looking at Internet companies in terms of subscriber-based valuations. I like to think of per-subscriber valuations as I would a mobile phone user. The following numbers are relatively simplistic, but not actually that far away from reality.
*On average, each mobile phone subscriber spends £400 per year.
*The mobile phone company's net profit margin is 20%, meaning they make £80 per customer per year.
*Each customer will use his or her mobile phone for at least the next 10 years. At the pace technology is going, looking any further out than that is absolute guess-work.
Here's how a simple per-subscriber discounted cash-flow calculation may look. The discount factor used is 10%. Present value is simply the profit multiplied by the discount factor. For all the gory details of this type of stuff, I'll direct you to pages 11 and 12 in the Fool's How to Value Shares series.
Year Profit Discount Factor Present Value 1 80 0.9091 72.73 2 80 0.8264 66.12 3 80 0.7513 60.11 4 80 0.6830 54.64 5 80 0.6209 49.67 6 80 0.5645 45.16 7 80 0.5132 41.05 8 80 0.4665 37.32 9 80 0.4241 33.93 10 80 0.3855 30.84 Sum of present value = £491.57
Based on those numbers, each existing customer could be valued at just short of £500. Of course, then you've got to factor in future growth from future customers.
Say you've got 1.5 million existing customers, and you operate in a market which is growing by 20% per annum. In 10 years time, you'll have 9.3 million customers. With each one of them valued at £500, you're looking at a current market capitalisation of £4.65 billion (£500 x 9.3m = £4.65b). Voila. Simple isn't it?
Vodafone Airtouch (LSE: VOD) have 28 million world-wise customers. Doing the same calculation and using the same assumptions as the example above, one would value the entire company at £86.5 billion. Today the market values the entire company at just over £91 billion. Who said the market isn't efficient?
But what about Internet companies? How do you value each one of their customers? You can have a stab at it for a retailer like Amazon.com (Nasdaq: AMZN), based on each customer's average spend, but what about a company like Freeserve (LSE: FRE), where advertising income may eventually become the largest component of their revenue model? That's the question I'll be trying to answer in the weeks ahead. Any and all ideas welcome on the Qualiport message board.
Tomorrow I'm off to a presentation seminar on Misys' strategy for the retail financial services and the Internet personal financial services (PFS) portal businesses, hosted by the company themselves. I will report back next week. Unilever (LSE: ULVR) report 3rd quarter results on Friday. Pre-tax profits are forecast to be in the £869m - £935m range, up from pre-exceptional £816m in the corresponding period last year. Rob will no doubt make mention of the outcome in this space on Friday.
Company Change Bid DELL(US)+0.60 41.20 EMA +0.29 8.10 IIG 0.00 2.77 MSY +0.10 5.41 PIZ -0.15 7.80 RTO -0.03 1.99 ULVR +0.03 5.57 LLOY +0.05 8.44 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 29/09/99 356 Lloyds TSB 7.56 8.44 11.7% 27/10/98 1133 Indep Ins 2.60 2.77 6.5% 04/11/98 245 Pizza Exp 7.93 7.80 (1.6%) 22/04/99 542 Misys 5.57 5.41 (2.9%) 27/01/99 74 Dell (US) 44.63 41.20 (7.7%) 17/04/98 301 Emap 10.20 8.10 (20.6%) 19/12/97 783 Rentokil 2.55 1.99 (22.0%) 17/07/98 266 Unilever 7.53 5.57 (26.0%) Last Rec'd Total # Company In At Value Change 29/09/99 356 Lloyds TSB 2723.20 3004.64 281.44 27/10/98 1133 Indep Ins 2990.63 3138.41 147.86 04/11/98 245 Pizza Exp 1966.34 1911.00 (55.34) 22/04/99 542 Misys 3065.85 2932.22 (133.63) 27/01/99 74 Dell (US) 2007.42 1847.76 (159.66) 19/12/97 783 Rentokil 2046.53 1558.17 (488.36) 17/07/98 266 Unilever 2052.00 1481.62 (570.38) 17/04/98 301 Emap 3139.85 2438.10 (701.75) Cash: £ 9.01 Current Total : £18,107.09 Total Invested: £20,184.62 Profit/(Loss) : (£ 1,863.69) Value Per Share Day Month Year Qualiport 0.74% 2.04% -13.25% FTSE 100 0.46% 0.40% 6.77% FTSE All Share 0.52% 0.61% 9.28%