4440
"(In homage to National Public Radio's Marketplace, fans of that show should now put their favorite version of "We're in the Money" on the stereo as we run the numbers.) The PEG sits at an especially attractive 0.50 using the current stock price of about $18. Using the low end of Emerald's long-term growth estimates combined with the median FY '97 earnings projections which are lower than Emerald's, the YPEG says the price in late 1997 should be at about $25. With an expected revenue per share of $12 in 1997, a stock price of $25 will reflect a price-to-sales ratio at a very reasonable 2.0.
Pitch #132: Dueling Fools: Iomega (4B)
by Mike Buckley and Rick Munarriz (MF Buck and MF Edible)"
As the maker of the ever-popular Zip Drive, Iomega (NYSE:IOM) has made it acceptable to talk about storage technology at cocktail parties again. As quickly as Zip drives and disks have flown off the store shelves over the last two years Iomega has found its stock soar until it corrected sharply last year. With the higher capacity Jaz and the Ditto & Bernoulli lines of tape backups the company has gone from financial uncertainty to solid profitability in that span of time.
MF Buck winds up with the Bullish Pitch: It's almost laughable -- OK, it's completely laughable. -- that I'm building a case for buying Iomega stock using only two paragraphs, recognizing that for two years it has probably been the most followed, analyzed, and discussed stock in all of Fooldom. We probably would need a Zip drive, maybe a Jaz drive, to store on one disk the reams of messages in the Graveyard supporting Emerald Research's impression that "Zip's floppy replacement story is still intact and there is no rewritable technology that has the same potential to succeed during the next few years." Though the Jaz is no slouch, understanding the essence of Iomega requires understanding the Zip since it is expected to bring in roughly two-thirds of the company's revenue and gross profit in the near future. Its low drive cost (attractive to OEMs) and low disk cost (attractive to users) helped make it possible to beat its primary competition, the remarkably unattractively named LS-120 and UHC, to market by about two years. That was and remains a reasonable trade-off for the one objection that the Zip drive is not backward compatible with floppies. Let the relatively few who need backward compatibility have their relatively small share of the market. The future product line looks for Iomega's n*hand to eventually "eclipse the Zip market" (Dataquest's opinion), for the Jaz to double storage capacity about every two years, and for the Zip disk growth -- where the real money is -- to increase more than 20% quarter-to-quarter over the next eight quarters resulting in 50 million Zip disks shipped in about the 3rd quarter of 1998. That's an expected five-fold growth in only two years. As they say, "It's the disks, stupid."
Now that we've established that this is a company with great products, what about the price of the stock? (In homage to National Public Radio's Marketplace, fans of that show should now put their favorite version of "We're in the Money" on the stereo as we run the numbers.) The PEG sits at an especially attractive 0.50 using the current stock price of about $18. Using the low end of Emerald's long-term growth estimates combined with the median FY '97 earnings projections which are lower than Emerald's, the YPEG says the price in late 1997 should be at about $25. With an expected revenue per share of $12 in 1997, a stock price of $25 will reflect a price-to-sales ratio at a very reasonable 2.0. All in all, based on the information I've read, I expect the price of the stock to be at least 40% higher in the next year than it is now, higher yet if the momentum players take over again on the upside. I also believe there is a case to be made that this stock has the potential to double over the next year based on fundamentals alone. Countering MF Edible's points (which I've yet to see) probably doesn't require me making that case so I haven't tried. (Since you didn't ask, Emerald Research used 22 pages, a far cry from my two paragraphs, to do exactly that -- to substantiate a projected double in the stock's price by the end of 1997.)
MF Edible takes the mound for the Bears: Brand me a Motley heretic, dump me in a river to see if I float, but I don't understand why Iomega is worth its $2.5 billion market capitalization. I mean, I got the same butterflies when I saw the drives magically disappear from computer stores in 1995, but as they moved into more mainstream venues last year, as Iomega ads canvassed the print media, as they piled more dirt on SyQuest's coffin, I grew jaded. After such a successful 1995, why was the company out of money in 1996? When they were all set for a secondary offering, why did the underwriters back out, forcing the company to offer convertible stock instead? The problem is that Iomega is, for all practical purposes, a one product company. The Ditto tape backup line is not proprietary as they duke it out with a handful of other players in the QIC price wars. Their own backup technology, Bernoulli, has been rendered obsolete. The Jaz has proven too expensive to compete with cheaper media like read-write CD-ROMs.
This boils down to the Zip, a present day monster that has devoured the market, as the only proven winner in the Iomega portfolio. But in a fickle market where technology has a short shelf-life (Bernoulli, SyQuest anyone?) the second tier analysts who follow the company are expecting $0.83 in 1997 in what has to be a shot in the dark attempt at forecasting. While picking up last year's winner for 20 times forward earnings seems enticing, the future is uncertain. Why? Well, serious competition is around the corner as the LS-120, being produced by much deeper pockets than Iomega, will introduce similar Zip capacity but in a format that is backward compatible to the floppy disk. This almost renders the Zip's early lead pointless since there are probably between 100-200 million computers users with 3.5" disk drives who have yet to upgrade to a 100 MB+ disk format, compared to the 4 million or so Zip users. There are also margins to consider since the widespread sell-off in the technology sector have found the prices on memory chips and hard drives in freefall. With hard drives going for half the price they were when the Zip was introduced, can Iomega hold on to their asking prices? No, and that is evident by the $50 rebate on their Zip drives with more margin erosion if the price of Zip disks drops faster than their ability to shave costs in the manufacturing end. While they might make it up in volume, who is to say that the demand will be there as the public becomes enamored with LS-120? But the LS-120 won't be forever, either, as technology is ever-changing, and one-hit wonders like Iomega may soon find their way to the "Where are they Now" column.
Here's the Pitch, for a HOMER. . .
At market close on MONDAY, JANUARY 20th (the last day of the current Today's Pitch Season), where will Iomega (NYSE: IOM, $17) close?
a) above 23, soaring?
b) from 21 to 23, uplifted?
c) between 19 and 21, steady?
d) from 17 to 19, bearing down?
e) below 17, hit hard?
Disclaimers: a) the positions taken by the Dueling Fools may or may not reflect their own opinions of the stock, b) the authors may or may not hold long or short positions, and c) as always, discussion of the stock in a Pitch does not constitute a recommendation of any kind by the Motley Fool, for or against.
Transmitted: 2/9/98 1:45 PM (s5p132)
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