Saturday, March 15, 2008

one method to value development-stage companies

this is one method to value companies which have no revenues or earnings; or book value is low relative to intrinsic value; or success is difficult to forecast; or for stocks that are easily hyped.

other questions: how big is the target market?

what is the estimate of the company's possible market share?

what is its cash burn rate?

here's a possible solution:

stock price x number of shares = total market cap

total r and d spending = for the last 5 years including the present year

divide the total market cap by the total r and d spending

possibly adjust the figures for so-called "wasted" r and d spending in an attempt to be conservative:

valuation = possible attractive investment = a number under 5

a fair valuation = a number around 10

a high valuation = a number of about 15x to 20x or more

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