Ron, Here is the Actual artical, copied from IBD on IOMG
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INVESTORS CORNER
The Case For - And Against - Iomega
Date: 10/3/96
Author: Chris Gessel
Would Warren Buffett ever invest in Iomega Corp.?
That may seem like a preposterous question given the data
storage company's meteoric rise and equally steep plunge. But
if you take a look at Iomega's long-term strategy, it's similar to
one of the billionaire investor's core holdings: Gillette Co.
Gillette has earned billions selling razor blades, but first it had to
sell the razors.
That, essentially, is what Iomega is up to. So far, it has shipped
three million Zip drives - the portable peripherals that allow
computer users to save up to 100 megabytes of data on a single
disk.
While that's an impressive number of units for just about any
consumer electronics item in its first year of production, it's the
disks that could deliver Iomega huge profits for years to come.
''The game in a nutshell is to sell disks,'' said Joe Besecker of
Emerald Research, who estimates pretax margins are more than
50% for disks.
The company has made a series of announcements that bring it
closer to its goal of establishing the Zip as the new standard to
replace floppy drives.
Iomega has signed on Matsushita Communications Industrial
Co. to make and sell Zip drives. Big chip companies like Intel
Corp. and others will make the specialized chips for the drives.
And soon computer users will be able to boot their machines
using Zips, another feature that could put the standard 3
1/2-inch floppy out of business.
Besecker thinks Intel's commitment is the most significant. The
goal is to put the functions of three or four chips onto a single
device, which he thinks could help cut production costs in half
during 1997.
''They have the potential to be to the storage industry what Intel
is to chips and Microsoft is to software,'' Besecker said.
After trading sideways for two months, the stock has rallied as
much as 87% to 27, retracing part of its decline from 55.
Analysts actually lowered third-quarter estimates last month to
six cents a share from 10 cents, according to Zacks Investment
Research Inc. But the reduction, which came in part because of
weakness in Europe, was not as much as some feared, and the
stock has surged.
''It's acting again like it was six months ago,'' said Todd Bakar, a
Hambrecht & Quist analyst.
But recent developments have not deterred short sellers, who
bet the stock will resume its descent. The number of shares sold
short is 25 million, about a quarter of the public float.
Bears contend Iomega remains wildly overvalued, trading at 80
times earnings and even three times sales. They say that at best
the Zip drive is a temporary solution to the problem of limited
floppy capacity.
''It's had its chance to become a standard, and now competition
is coming from all over the place,'' said money manager Meyer
Berman, president of M.A. Berman & Co.
Rival products include the LS-120, a 120-megabyte drive that is
not as fast as the Zip but can read existing floppies. Compaq
Computer Corp. is selling it in its DeskPro line of PCs.
Another is a 128-megabyte drive being developed by floppy
drive behemoth Mitsumi Electronics Corp. Down the road are
devices like the Digital Video Disk and rewritable CD-ROMs.
What's more, the market for storage devices has not developed
as people anticipated, bears say. Computer makers are
cautiously testing the market for Zip drives and other storage
devices in their machines, but so far they don't see strong
end-user demand.
''There's probably six or eight kinds of products - some optical,
some floppy, some hard and some blended. What ended up
happening is the public went on strike,'' said a San Francisco
money manager.
One big drawback to the Zip drive is it's not backward
compatible - you can't read old floppies on it.
''I'm not sure there will be a standard to replace the drive,'' said
Jim Porter of Disk/Trend, a Mountain View, Calif., research firm.
''None of the things out there look like they have the potential to
reach that point. If Zip can sell to only 20% of computer users,
that's still a big market.''
Getting costs near the level of existing floppy drives and disks
is a major challenge for everybody in the ''super-floppy'' race.
Zip drives are now selling for as little as $99 in Micron
Electronics Inc.'s computers and $150 retail. Disks run about
$20.
This, bears say, creates a conundrum for Iomega: ''They can't
drive the price down without destroying margins and earnings,
but then they can't become the standard until they drive the
price down,'' the San Francisco money manager said.
Computer makers spend $17 or $18 on a floppy drive and aren't
about to raise costs unless consumers unequivocally demand
more storage.
''Most of these (PC makers) would kill a relative to save $10,''
Porter said. ''They'd kill their mother to save $20.''
But Iomega and the Zip drive have a big head start and already
enjoy significant brand recognition. The company has proved it
can profitably take a technolgy to market, burying rival Syquest
Technology Inc. in the process.
''It's still in the early stages of the game,'' said Bakar of
Hambrecht & Quist. ''People should not expect this war to be
decided in the next six months.'' |
