Let’s start with the company’s current valuation.
Stock price per share ($) 7.1
Number of Shares (in ADS) (m) 68
Total market cap ($m) 483
Minus cash from IPO ($m) 200
(after paying $50m loan)
Current net market value 283
Let’s move on to the business side. Assuming I just can not trust anything from the company -- income, expenses, taxes, etc., still I feel it is safe and conservative to make an assumption on the revenue. Assumption: The company is going to accomplish its plan of $110m revenue this year.
With this assumption, the price to sales ratio is traded at 2.6 (i.e. 283/110).
Here we need some benchmarks for comparison. I am trying to find those as approximate in business as possible. The one closest is Focus Media (FMCN). Its P/S ratio is 11. (All sales are 2007 estimates, based on the information from Yahoo Finance.) This figure is 7.5 for Sina (SINA). (It would be about 11 if its wireless revenue is taken out.)
It is clear that XFML is traded at an extreme discount by comparison.
Given the secular growth in the advertising market in China, I can argue that XFML is in some aspects better positioned than FMCN. And definitely XFML is growing very fast.
Next I am trying to do an exercise to get a rough estimate of XFML’s valuation. I am conservative and take a deep 50% discount from the comparable valuations. So I assign a P/S ratio of 5.5 to it. This results in a total market cap of $805 million (200m cash + 110m * 5.5). Then I am going to throw a $50 million bone to lawyers. So the final conservative estimate of the market value would be $755m, or $11.1 a share.
To summarize, I believe the fair value of XFML is at least $11. More upside could come from two aspects: one, expansion of the multiple after the company demonstrates consistency and, two, the upside of sales. The risk is the market continues to panic.
The above is just my opinion. I may buy or sell any time. I welcome critics.
Disclosure: Author has a long position in XFML
XFML 3-mo chart