AYX prelim thoughts

AYX is my largest position, I follow them very closely but was totally surprised with the early release of preliminary numbers. I had sold about 25% of my position when AYX EV/S had surpassed their highest valuation ever in their history. Even selling 25% AYX was still my largest position at about 10% of my portfolio. The reason I did this was AYX had reached an eye watering EV/S of 25. This is using a stock price of 74, 61.38 million shares outstanding, ~200 million of cash and 182 million TTM of revenue. To support that valuation I felt like AYX was going to need to show continued accelerating growth. Just to review they have been accelerating their revenue growth as shown below.


Q1 2018          50%
Q2 2018          54.4%
Q3 2018          58.7%
Q4 2018     and the current quarter of 52.9%

As we can see this latest quarter was very good, just not continued acceleration. Some of this might be due to the switch to ASC 606 and the way they are recognizing the revenue. We aren’t going to find out until they release all their numbers and the ASC 605 to 606 reconciliation. Either way I’m not worried in the slightest. This has the appearances of a great quarter and now the valuation is much more reasonable as we got a double whammy to the valuation. Our TTM Revenue is now 203 million and the share Price came down to 68 which drops the EV/S to 19.5. A valuation that I’m happy to buy back into. This was a bit of a portfolio decision for me as I could do this is in a tax advantaged account and my AYX position had grown large enough in combination with the stretched valuation that I wanted to trim it. If I had thought at 74 that AYX was a great value then I would not have trimmed. If AYX had accelerated to 60% growth I would have happily bought back in, I just didn’t think that was likely.

Best,
Ethan

One other note, I wouldn’t have done this if I had to pay taxes.

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Our TTM Revenue is now 203 million and the share Price came down to 68 which drops the EV/S to 19.5.

You’re assuming shares outstanding holds at 61.38m? I don’t think it will. Plus in Q3 they said: Non-GAAP net income per diluted share for the third quarter of 2018 was $0.08, based on 65.5 million non-GAAP weighted-average diluted shares outstanding so I would quibble with your last-Q number anyway.

Bear

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You rightly point out that I’m assuming the same number of shares which probably won’t be the case. Thanks, that is definitely helpful.

we have debated which types of shares to use before. Probably not going to convince each other. Each has its place. Quibble away ;).

from the 10-Q "On November 1, 2018 , there were 37,630,900 shares of the registrant’s Class A common stock outstanding and 23,752,318 shares of the registrant’s Class B common stock outstanding. " Which is 61.38 million shares.

-e

we have debated which types of shares to use before. Probably not going to convince each other. Each has its place. Quibble away :wink:

OK. I’ll bite. My thought is for companies increasing their share count, I will use the latest quarter’s share count to calculate EV/S or P/S. In this case, AYX has given us the share count they use in their guidance in the last earning’s report. So either one may suffice, but we know the share count is increasing so I usually err on the side of caution (higher share count). Certainly one thing you see that makes no sense to me is an average share count over say 9 months or a year. That will be lower than the last count and doesn’t do anyone any good to use in calculating valuations, if in fact you care about that sort of thing which some don’t and that is fine too.

Taking this one step further, I have thought of trying to model a forward estimate of dilution to see how companies stack up against each other. I have not done so to date. When looking 12 months forward for valuation, I always use today’s share count. But for two companies growing at the same rate, the forward valuation of the one that has less dilution should look better than the one issuing more shares. In some instances, the difference is negligible. In others it may be more stark.

A.J.

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Hi A.J., I understand your thoughts here and agree to a point. If I’m not mistaken, the actual definition of share count usually entails the average count over the prior 4 quarters. This used to drive me crazy, because of exactly what you mention–if a company is issuing shares like quarters at a slot machine (or buying back shares like crazy) it seems foolish to use any type of average.

But the thing is, unless a company suddenly changes their rate of buy-backs or shares issued, it really doesn’t make a lot of difference which you use for the sake of comparison. What matters more is that an investor does not use different sources when comparing. Different sources meaning various websites and/or one’s own customized method of calculating shares. Doing so can make any comparison totally meaningless.

Like you, I use Q0 for the basis, but then adjust it, if needed, by the rate of change over the prior 4 Q’s. Again, I’ve found that the difference does not change other calculations and ratios significantly if the rate of change hasn’t suddenly grown or reversed (e.g., instituting a new buy-back or employee option grant program.)

The bottom line is that consistency is most important, and one should always use the same source (or self-designed calculations AND source) when comparing share count and dilution between multiple companies. At least that’s my conclusion. :slight_smile:

12 Apples + 23 Oranges = 1 pile of fruit

Dan

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