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Valuation is the topic we get the most questions on: What metrics do we use? How did we arrive at that target price? Valuation is an art not a science. There's no exact formula. You have to asssess many factors to determine fair valuation for an industry, a sector, or a company--the top-down approach. We think the best valuation metrics are earnings or cash flow. Sometimes, other metrics are used depending on the situation, such as no earnings or poor industry fundamentals. Such metrics include total enterprise value, net asset value, discounted cash flow, and revenue multiples.
The key to valuation is finding a common ground between all of the companies in a universe for the purpose of a fair evaluation. Typically, we work our way up the income statement until we find common ground to compare all of the companies in a particular sector. In the end, valuation is only one person's opinion and can differ from individual to individual; hence, the efficient market theory as all opinions are aggregated. A look at the collaboration sector should provide some insight into how valuation can differ within a sector.
Currently, the collaboration sector is top on the minds of most portfolio managers as the 9.11 tragedy has cut business travel and prompted the use of Web and phone conferencing. "Training in the Post-Terrorism Era on page 24.
Centra, Genesys, Raindance, and WebEx are expected to benefit, so expect strong stock performance and greater valuations based on earnings upside. With strong industry and sector dynamics, the market and analysts must then focus on individual companies and their business models to gauge appropriate valuation--such as, client base, competitive positioning, sales channel, pricing power, reoccurring revenue stream, margins, and management. In the collaboration sector, there are three business models: phone conferencing, integrated phone and Web, and Web-conferencing. The traditional phone model has the lowest margins and least pricing power compared with Web-conferencing, which has the highest margins and best pricing power.
Regarding valuation metrics on individual companies, WebEx and Centra have the highest multiple based on product offering and positioning (Web-based); growth opportunity; pricing power; margins; and, most important, confidence in path to profitability. Traditional teleconferencing companies such as Genesys and Act Teleconferencing, who have modest Web offerings, have received lower …