RE:RE:RE:RE:RE:RE:RE:A NewsletterLet me start with the negatives.
Synodon is an unprofitable company that is running out of cash in one of the worst financing environments in memory. Based on this in isolation, the downside is 100%.
I also think the company has made some strategic mistakes. In my mind a start up like this should have:
1. Developed the product to the point that it was better than the alternatives.
2. Sold the product like crazy to become profitable as early as possible.
3. Used the profits to invest in improving the product.
However, I think they have done a lot of R&D to improve the product without having the income stream to finance this. This has made it dependent on external financing which is in very short supply.
Even if the company does get financing, it is likely to be dillutive for existing shareholders and could involve warrents that take away some of the upside. Furthermore, although the Q4 results will be great, the managment have already flagged this to the market. Therefore, this may be priced in and so maybe we get no futher upside until SYD signs large new contacts, which is a complete unknown.
But now the positives.
The product seems to be great. The customers like it, which is clearly demonstrated in the significant expansion of use they get from customers that initially trial it. This suggests that if they improve their sales technique they could grow quite rapidly.
It seems to me that it is the type of product that will hit a tipping point. That is, after a certain amount of take up by customers, the product will sell itself by word of mouth. I really think there is potential for a massive growth phase when this happens.
Another potential tipping point is regulation. Eg regulators could decide that pipleline companies will be required to use best in class leak detection systems or face significant penalties. Again, this type of action could spur rapid growth.
Finally, the company is on the brink of profitability. When it is clearly no longer dependent on external financing (which could be a year from now) the downside (ie zero) becomes much less likely and the maket will, I think, focus much more on the upside factors (significant growth potential with a patent protected technology).
I think there are too many uncertainties to build a valuation model. But if synodon become the pipline surveyor of choice for the major pipeline owners, its market cap will not be $12m, it will be many, many multiples of that.
So for me, the upside (which could easily be 10, 20, 30... times current levels) outweighs the downside. I would be buying more if I had any free cash to invest!
N.