While most of the feedback was, lamentably, unprintable in a family publication like The Motley Fool, the upshot was that while Xybernaut is not making money now, it is at "the beginning of a J-curve." For those not familiar with the term, J-curve refers to the chart of a start-up company's stock price when its product begins to gain widespread acceptance. After a short period in which the chart resembles nothing so much as a flat line, the stock's price suddenly shoots straight up.
I must admit that I know nothing about chart reading -- or tea-leaf reading or other species of clairvoyance, for that matter. What I do know is valuation -- and valuation matters. (And yes, valuation still matters, too.)
So let's take a quick look at Xybernaut's valuation. After falling 22% on Monday, then bouncing back 8% on Tuesday, Xybernaut's price stood at $1.15 per share. It had no earnings, which makes it difficult to calculate a price-to-earnings ratio on the stock. But let us hypothesize for a moment.
Assume Xybernaut did have some earnings. Further assume the company's growth was going gangbusters -- say 100% annual earnings growth (in contrast to the actual, anemic 10% revenue growth it posted in 2003).
Under conventional valuation metrics, one can say that Xybernaut would be fairly valued if its P/E, divided by its earnings growth rate (also called its PEG), equaled 1.0. So:
$1.15 / E / 100 = 1.0
"E" therefore equals $0.0115. So, if Xybernaut had earned a penny per share in 2003, and if Xybernaut were growing 10 times faster than it actually is, then it would now be fairly valued.
Back in the real world, Xybernaut has grown its revenues at an annualized rate of roughly 7% over the past five years. Using revenue growth as a proxy for the non-existent earnings growth, Xybernaut's fair value calculation would look more like:
$1.15 / E / 7 = 1.0
Here, "E" has to equal $0.16. To be fairly valued, Xybernaut really needed to earn $0.16 a share in 2003 -- or about $28 million. Since that number is 2.5 times the amount of revenues Xybernaut actually pulled in, the company still looks overvalued at its current price.
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Motley Fool contributor Rich Smith owns no shares in Xybernaut.