Valuation Applied - Does ShoreTel's Market Cap Make Sense?

Valuation is my favorite subject to teach. Beyond tutoring the subject and applying it every day at work, I also use the same concepts to invest.
Many of you may be familiar with a sum of the parts valuation. What if I told you there was a company out there with a business that comprises 20% of its revenue that would be worth $250-400mm on a standalone basis. Not that exciting yet. What if I told you that the entire company's market cap is $220mm!!! If you're still not excited, you may want to sign up for a few lessons. If that caught your attention, keep reading.
ShoreTel acquired M5 a while back for around $180mm (I'm writing this all from memory so please excuse approximations). M5 is around $70mm of revenue inside SHOR (total company revenue >$300mm) and is growing at over 20% per year. A good comp for M5 is 8X8 (EIGHT), which trades at a whopping 6.0x revenue. Both 8X8 and M5 are off-premise Unified Communications solutions.
The question to ask to determine whether you struck gold when you find an opportunity like this is whether others know about it. If they do, and the market price doesn't reflect your thesis, you're probably missing something. A good check on whether the market knows about it is breadth of research coverage and trading volume. Well it just so happens that no big name banks cover SHOR. As a matter of fact, less than five analysts cover the stock! ADTV? Trades about 150k shares per say at $4 per share... not exactly the type of volume from a stock with adequate %float you'd expect from a stock investors are knowledgeable about.
Great investors don't show up to the wedding during cake. Get in early. Be patient for 2-3 years with the lack of volume to lift your stock price. Hold tight if they miss earnings by a bit and the stock drops double digit percentages in a day. Once some banker tells these guys to IPO carve out M5, or the company simply grows organically to the point that bigger banks start knocking (hence, leading to some real deal research coverage), the market will take notice and $4 can turn into $12 before you know it.

DISCLAIMER: I AM LONG SHOR. My rationale is completely based on the above reasoning. I have no material non-public information regarding SHOR. The views above are my own, and not reflective of my employer.


Matt H.

Investment Banker teaching modeling, valuation, CFA, corp fin, excel

10+ hours
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