Orion Commentary ReduxRecently, I posted a comment from Orion stating that it was in the process of reworking its analysis and target price for Absolute. Orion has followed that up with a very interesting report titled "Absolute's Next Step Could Be A Big One...".
Here's the report summary, verbatim:
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Update to Our Investment Thesis
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• Absolute has had tremendous success in the past two years. Sales have grown 235%, subscribers are up 260%, cash flow is up 1,000% and the stock is up over 1,000%.
• There are a number of factors that have contributed to Absolute’s success. However, we believe the single biggest catalyst was the signing of BIOS deals with the major PC OEMs in 2005. As a result of these deals, Absolute’s software agent is embedded in the PC at the point of assembly, leading to broad distribution and increased sales support from the PC OEM channel.
• Management has successfully monetized the PC OEMs’ support. We expect this to continue and to be reflected in strong quarterly results, growth in subscribers, the announcement of additional bundling deals and a ramp-up of sales in Europe. However, the market is aware
of these opportunities and we believe it is discounting some of this future success.
• Given the stock’s performance, has the story run its course? Not necessarily. While having its software agent embedded in the BIOS was a significant step, the company’s next step could make Absolute a key enabling technology in the PC security market. It is possible that PC
component suppliers—for example, hard drive or chipset manufacturers—begin to embed Absolute’s software agent in the components they manufacture.
Implications
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• If Absolute is successful in getting its software agent embedded elsewhere in a PC, we believe the market opportunity for the company would increase 2×–3×.
• The impact on Absolute’s business would be significant. It could quickly expand beyond the U.S. to address a global opportunity. The breadth of services Absolute provides would likely expand, and the company could look forward to product, marketing and sales support from
other major OEMs in the computing industry.
Conclusion
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• We are increasing our target price from $23.50 to $31.50 with an Overweight (Speculative) rating based on 20× our F2009 CFPS estimate of $1.15 plus $8.00 in option value for the opportunity we describe in this report.