Contact: Brenon Daly
Regardless of the fact that Isilon Systems hasn’t traded on anything remotely connected to its underlying financial performance for a long time, the NAS vendor nonetheless reported third-quarter results earlier today. As these things go, it was a strong report: sales up 77% and a solid profit, reversing a year-ago loss.
The results pushed shares up about a buck to $28 each in mid-Thursday trading. That continues a run that has seen the stock nearly quadrupled so far this year, giving the storage company a mind-blowing valuation of nearly $1.8bn. The third-quarter report notwithstanding, much of that run has been spurred by acquisition speculation, with EMC reportedly in exclusive talks to acquire Isilon.
To understand how detached Isilon’s valuation is from reality, consider this: For every dollar of earnings that Isilon is projected to bring in this year, investors are valuing that at $100. That’s right, a single greenback is worth almost 100 times that amount to Isilon’s market cap. Through the first three quarters of the year, Isilon posted GAAP net income of $7m. Even assuming that the company has a blowout fourth quarter, full-year 2010 earnings are still likely to come in below $20m. Meanwhile, its equity value continues to creep toward $2bn.
Even on a more conventional measure, Isilon’s valuation ratio is still highly inflated: For every dollar in sales the company brings in, investors are valuing that at $10. At an equity value of $1.8bn, Isilon is currently trading at 10 times current-year revenue, and almost eight times next year’s revenue. Keep in mind, too, that those valuations don’t take into account any acquisition premium that would undoubtedly figure into the deal. Every dollar that a bid comes in above Isilon’s current market price adds more than $75m to the company’s price tag. That’s assuming, of course, that a bid comes.