This is somewhat of a long-winded post but please bear with me.
I have completed three valuations: conservative, base case and blue sky...
The following is a summary of my key inputs and assumptions:
Addressable Market: I have adopted APK’s assessment of market size and chip-to-device ratios as per their November 2015 presentation (slides 29 and 30). One of the key differences between my valuation and Bobloblaw's is that I have used 2018 projected micro speaker sales, not 2015 sales. I have then applied the micro speaker growth projections to the other device categories. We would be selling ourselves short basing the valuation on 2016 or 2017 sales...plus acquisition may not be until 2017 so the 2018 projection would be appropriate.
Profit per chip: This will ultimately be set by the market, but I am bullish on our bargaining power given we will have the market cornered – a “universe of one”. My conservative profit per chip starts at $0.40USD and ramps up to $0.60USD under the blue sky scenario... I think we can achieve $0.50 per chip - I have had that figure in my mind for quite some time but can't recall exactly where it came from. Using the smartphone market as a yardstick, if we assume the analogue micro speaker in an iPhone costs about a dollar (my quick scouting on alibaba.com this morning suggests that’s about right for all the different components) and our digital chips cost up to three times that (random guess) including our $0.50 profit, I expect we are only adding about $10 max to the end price of an iPhone for what would be a significantly superior product. We know people will pay more for better products, hence why everyone ditched their $300 Nokias about 10 years ago and replaced them with $800 iPhones, Galaxies, Androids etc. Even at between $0.40 to $0.60 profit per chip I think that leaves a lot of room to be pleasantly surprised. We should try and get some guidance on this input at the AGM.
Sales and market share: Anyone’s guess but in my conservative scenario I used 10% and ramped that up to 40% for blue sky. I have used AKP's declared target of 15% for my base case although I can't help but feel that's a little conservative still. I am actually struggling to see how analogue speakers will be able to co-exist with a digital alternative that is smaller, louder, clearer, more energy efficient and technically superior in every other way... Analogue phones died out within 24 months of digital cordless phones hitting the market. Cathode ray TVs hung around for a little longer after the arrival of plasma/LCD but this was due to the huge price differential between the products for the first few years. The cost differential between analogue v digital speaker chips will be nowhere near as pronounced and so I expect the demise for analogue speakers will be rapid, meaning 15% should be easily achievable.
Price to earnings multiplier: Based on my research of other tech hardware acquisitions a P/E of 15 sounds about right but a P/E of 20 could also be achieved....For instance, Compaq was acquired by HP back in 2001 for a P/E of about 19.
So building my valuation scenarios off the back of these assumptions, I get:
My Base Case =$1,047 per share (15% market share, $0.50/chip, 15 p/e)
Blue sky = $4,442 per share (40% market share, $0.60, 20 p/e)
We as investors need to understand the potential here so we aren’t sold short, although I suspect Fred Bart, Danny Lewin and co already know this.
This is already a long post but we should also be conscious of the impact these digital speakers could have on the competitive landscape and what that advantage to someone like Apple is worth. Let’s look at the classic heavyweight battle between Apple and Samsung for the smart phone market. The latest data from research firm IDC reveals that Apple's smartphone market share dropped to 15.3% in the March 2016 quarter (down from 18.3%) while Samsung also dropped marginally to 24.5% (down from 24.6%). With smart phone shipments totalling approx. 1.34 billion units for 2016 (all manufacturers) and assuming Apple HQ receives about $500USD of the $800USD retail price per device, that’s $102Bn in annual smart phone revenue to Apple. If Apple was to acquire exclusive rights to APK’s digital speaker chips it would be reasonable to expect that our technology could prompt a significant shift in market share. If Apple and Samsung were to flip places, that would mean an additional 61Bn USD in annual revenue to Apple!!! If in crude terms about a quarter of that is earnings, that’s about $15Bn more to Apple for a single year. Keep in mind, it's $15Bn before you factor in the possibility of any additional earnings attributable to the higher price tag these phones might command in the marketplace. And then keep in mind we are only looking at smart phones in this example. Given the sheer scale of the markets to which our product appeals and given how truly disruptive this technology may be, it really makes you wonder whether the blue sky scenario is as far-fetched as it first seems. Only time will tell but there is not long to wait now.
(20min delay)