DW8 Chart, page-618

@ilikethestock I think the charts are great to provide a relative market context and how smaller capitalization names led the correction, both in terms of timing but more importantly in the magnitude of valuation compression to date. Thanks for sharing and keep them coming. Despite lacking an appropriate and normalized valuation proxy for DW8 that precedes 2019, I believe that it actually traded substantially above the red line (comparatively speaking) when at 150.9X TTMsales its shares closed at 19.5c ATH, and also has already corrected in excess of the black line in the chart. Using the multiples in the chart as a relative proxy to judge DW8’s relative multiple compression (using TTM sales in absence of P/E),the expansion and followed compression to date imo well exceed that of the US small-cap index. It’s obviously not apples to apples but comparing magnitudes of the moves does offer some relative context.

DW8 is priced at 4.8X TTM which will most likely reset to around 3.6X once FY22Q4 revenues are announced in July 2022, and then further down as 1H FY23 comes in (holding the current SP constant for analysis sake).By any historical standard of comparison for DW8 since Dec 2019 that represents the lowest valuation to date and is approximately 1/30^th of its peak valuation (based on closing SPs). To put that into perspective, the implied market cap today assuming ATH closing TTM multiples would exceed $2.15B simply because of how different fundamentals are. Obviously the firm isn’t worth that much today, nor was it worth that much a year ago, so how much of the SP move from April 2021 to today is due to a) the correction of the overvaluation back to a mean and b) how much, if any, is due to overshooting the mean?

In absence of a normalized historical mean valuation, one could determine a proxy that could be extended historically against which to compare prices to determine historical deviations around that implied value. It’s clearly just a proxy but may help contextualizeDW8s SP performance vis a vis multiples in the context of the overall market’s multiple development.

Two brokers in Feb ’22 and March ‘22 issued SP targets of 8c and 7c (using a DCF approach) based on the most recent financial data (FY22 Q2 at time of report issuance) and their forecasts for the business. Based on those and the FY22 Q2 data these implied a 20.2X and 17.7X TTM multiple range. The difference in their FV assumption (i.e.their FV target) is reasonably close at slightly less than 15% differential that 7.5c could be used as a proxy SP target (FV). If we work back using this information as a rough guestimate for a historical multiple then we can determine the implied premium/discount of the actual SP to the implied FV using the TTM revenue multiple. Using this multiple range the SP target effectively resets each quarter-end when new quarterly revenue figures are published. For simplicity, the FV target from mid FY22 Q3 was rolled forward. There are pros/cons to any approach of course as multiples do vary over time, but considering these estimates were issued in mid FY22 Q3, and reflect adjusted fundamentals as well as market assumptions it’s a more objective approach one could apply than simply guessing FV in a historical context. This offers a way to judge historical deviations from a target that could proxy a normalized mean, especially since some of the assumptions are substantially normalized vs. 2020/2021 and thus are more realistic. (Again, simply to contextualize things.).

The charts below illustratethe historical SP performance vs. the implied FV of the shares since the end of 2019,as well as the implied percentage return required for the SP to reach FV at any time (2nd chart). With the exception of Q1 2020, the SP traded at a substantial premium to implied (backed out) FV most of the time until early October 2021 when the selloff pushed the SP towards an equilibrium with FV.


After reaching that equilibrium in Oct 2021, the SP then undershot FV and has since been trading at an increasing discount to FV. As of the recent close that discount implies approximately 188% upside to an average FV of 7.5c.



The magnitude of the implied deviation from FV last year was substantially larger (relatively speaking) than what the US equity indices charts capture, as was the compression below FV from October last year to now. While the data obviously doesn't provide a definite floor value or absolute floor indicator, it does illustrate the asymmetric setup presented assuming a mean reversion or normalizing scenario which will occur, eventually. The upside potential is larger if we apply a reasonable band of outcomes around FV considering reasonable historical valuation metrics and the tendency for prices to over/undershoot. Picking absolute bottoms is extremely difficult (as is tops) but knowing where one is relatively speaking should help frame the opportunities. Crazy stuff happens in bull and bear markets -- context and relative perspective matter. And as @ilikethestock said, knowing the broader market context and how things are going fundamentally helps ease the nerves. And in times like this context matters as otherwise fear will take over.