FOOLS RUSH IN (AGAIN?) By CHRISTOPHER BYRON
December 1, 2003 -- HERE at Curmudgeonly Arms, where news from beyond the moat arrives seasonally at best, the castle's crippled manservant, Yorick, recently dragged his club-footed and withered left leg up the stairs to the writing garret in the north tower.
Placing a crumpled news article on the desk, he retreated from the chamber in his hunched-over and groveling way, muttering, "Heh, heh, another victim, sire." Of course, as he always does when angling for a laugh, the man missed the top step (that Yorick!) and went tumbling head over heels down the tower's winding and windowless staircase.
Alas, poor Yorick, I paid him no mind, absorbed as I already was in the reading matter he had brought me, for it suggested an exciting new way for investors to lose money in the current, frothy stock market.
The idea: Buy shares in a obscure and struggling California outfit called 8x8 Inc. - which plans to take on corporate giants like Verizon, AT&T and many of America's largest cable companies simultaneously by selling "all you can eat" phone calls over the Internet. Viewed from the north tower of C.A., 8x8 Inc. seems to be emerging less as a real business than as a gambler's bet that the company will be taken over by a larger rival before the money runs out and the business collapses.
Meanwhile, investors have been going nuts over the stock. Back in February, the shares were selling for a mere 17 cents, and were still trading for barely 50 cents as recently as August. Yet by Friday they were changing hands at prices as high as $8.06 before ending the day at $7.52.
At that price, the shares have gained 4,323 percent so far this year, making 8x8 Inc. far and away the hottest Nasdaq stock of 2003, sporting a market value of $232 million for a business with just 53 employees and top-line revenues of less than $10 million per year.
In most cases, the market value of a company like 8x8 Inc. amounts to a statistical fiction. That is because of the way the market value of a company is calculated - by multiplying the price of its stock in the open market by the total number of shares issued and outstanding.
Since trading in these companies typically amounts to just a few thousand shares a day, whereas the total shares outstanding could run to the tens of millions, it makes no sense to claim that the quoted market price reflects what one would get if all the company's shares were offered for sale.
But 8x8 is different. The company may not be worth much more than the cash on its balance sheet - about 30 cents per share at latest look. But plenty of investors think otherwise, with the result that real money is pouring into the stock and millions of shares are changing hands daily.
On Friday, trading volume in 8x8 reached a record of nearly 23.5 million shares, or 75 percent of the company's total shares outstanding, making it the second-most active stock on Nasdaq, behind Microsoft.
The stock is hot because the tech sector itself is hot, with the Nasdaq composite rising 52 percent in value since its trough of last February, vs. a gain of 32 percent for the blue chip Dow industrials since the average touched its own 2003 bottom a month later.
Such frothy markets invariably breed "concept stocks" that investors begin chasing in hopes of catching the next market leader. This is how investors wound up with stocks in bagel companies - and companies in the plastic tampons business and the backrub business and what-have-you - during the last bull market.
Now, the "voice over broadband" business has become the tech sector's hot new "concept," and 8x8 has emerged as the sector's Pet Rock.
According to one recent article, getting the service up and running takes "less than five minutes" and is so simple to accomplish that even my grandmother could do it.
According to the company's Web site, you start by sending away for a "DTA 310 handset-to-Ethernet desktop terminal adapter." (That's where my grandmother bows out.) Next, you hook up one end to your phone, and the other end to your "home router or gateway." And that's where I bow out. (Did you see that word "router"? That's the Anglicized variant of the French verb routié, which means "to ruin your whole weekend.")
Finally, you switch your phone service from ATT (or Verizon or whatever), and start making those unlimited phone calls to anywhere in North America for $19.95 per month (or to anywhere on earth for $49.95).
But wait. What if you make all those connections just as you're supposed to - from the thingamajigger to the whatchamacallit, and finally to the routié - and then pick up the phone to place that first blow-your-mind phone call over the Internet, and there's no dial tone? How are you going to call tech support?
In reality, "voice over broadband" isn't a business any more than "faxing" is a business. It's just an activity that can take place over an existing communications network. In fact, if any money at all can be made from "voice over broadband," the cable companies that already operate the networks are in the best position to try; they at least already know who their customers actually are, and how to reach them most effectively and inexpensively.
A number of cable companies are getting into the game already. Cablevision Corp., which has one of its big fat black wires running right through a wall of Curmudgeonly Arms, now offers an unlimited calling plan for voice-over-broadband service at $34.95 per month, and other cable companies are looking at similar deals.
What's more, it is ridiculous to think that the phone companies are just going to watch their customers disappear. If residential subscribers begin migrating to cable-based telephone services, the phone companies will do as they've been doing all along for years now and simply keep cutting prices to cling to their market shares. And in a race to the bottom, 8x8 cannot win.
THE company has had an auditor's "going concern" warning on its financials for the last year, and is currently raising money through stock-and-warrant private placements - a desperation move if there ever was one.
One need look no further than the company's latest quarterly financial report, for the three-month period ended Sept. 30, to see the problem. Nearly 90 percent of this company's revenues come not from the voice-over-broadband gimmick at all but from supplying chips and software to the videoconferencing market - a business that is apparently not doing well. The 10Q says that most of the revenues for the segment are coming from non-recurring licensing deals.
In reality, revenues from the voice-over-broadband business totaled a mere $214,000 in the September quarter, resulting in a negative gross margin of 45 percent. Throw in the rest of the corporate overhead allocable to the segment and the business generated four dollars of losses for every one dollar of revenue.
There's also a puzzling little item in footnote No. 5, which discloses that the company's chairman, a fellow named Joe Parkinson who in an earlier lifetime was a founder of Micron Technologies Inc., gets to day-trade $1 million worth of the company's cash - apparently to help beef up the balance sheet.
Yet the company's cash flow statement shows negative cash flow of $802,000 from "short term investments" and "trading activity" over the last six months, so maybe Joe's talents as chairman lie elsewhere than day trading.
In any case, 8x8 Inc. may be this year's hottest stock on the Nasdaq, but I doubt that any investors holding the shares this time next year will be laughing very much. And speaking of laughs, is that poor Yorick I hear moaning at the bottom of the stairwell? Let's hope the Rottweilers don't mistake him for a Democrat.
* Please send e-mail to:
cbyron@nypost.com
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