A Foolish look at Taser should make you wary. At its peak two weeks ago, the company's market capitalization was $1.8 billion. It's now much nearer to half that. But with trailing revenues at around $34 million, the stock still trades at an electrifying 36 times sales.
The company's defense is that its market penetration is low at 6.2% of police and corrections officers in the U.S. -- and the international market is 10 times the size. Add in the military, private security forces, and the ultimate prize -- the civilian self-defense market -- and you have a gigantic pool that is largely untapped.
If every U.S. officer were equipped, Barron's estimates sales would be around $800 million, compared to today's market capitalization of $886 million. But when you consider Taser's profit margins at 27% far exceed those at lethal weapons competitors Smith & Wesson
And remember, Taser also sells "cartridges" -- the Taser equivalent to ammo. Ideally, that's a similar business model to Gillette
The U.S. military has 1.4 million troops on active duty -- which is a market roughly 30% larger than domestic law enforcement. Add in Reserves and Guard and you get another 1.2 million. It is a market with the potential for very large orders.
Then there are 117 million American households. The company is introducing a new product for this market -- one it shifted away from in 2000 to focus on law enforcement. This is the holy grail of potential, but sales, not potential, provide long-term value.
There are potential problems with Taser as well. Orders grew by 13% in the latest quarter, but that hardly justifies a stock trading at 60 times 2004 projected earnings. Currently, Taser faces no real competition. What will profit margins be when competition arrives?
There is also the issue raised by Viacom's
It's only natural to be wary of a stock that is up 25-fold in a year. Then again, while it might seem a stretch, Dell Computer
Sometimes rich Taser is. But, is it grossly overpriced?
If it weren't for its high valuation, Taser might have the one-two punch Tom Gardner's Motley Fool Hidden Gems newsletter looks to exploit. Take a 30-day free trial and uncover values that have yet to appear on Wall Street's radar.
Fool contributor W.D. Crotty does not own stock in any companies mentioned.
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