[A good read] Unscrambling Value: Egghead, Past Chicken & Egg Stage
Fri May 08
By Steve Harmon
Senior Investment Analyst
Internet.com
"Where Wall Street Meets The Web"
Its latest quarterly results show 100% Internet-based etailer Egghead.com (NASDAQ:EGGS - news) in transition from bricks and mortar to clicks and modems. Our analysis shows that we think the worst may be over for EGGS and that with its cash, brand and deals it could command a multiple at least in line with peer ONSALE (NASDAQ:ONSL - news) .
If EGGS can make it past the hatchling stage on the Web, and its deals with Yahoo, CNET, theGlobe, GeoCities, InfoBeat and USA.Net seem to indicate it might be able to, then a peer valuation multiple of 2.6x annualized revenue may not be out of line. That implies EGGS at $18 per share. May 7 it closed at just over $9.
Egghead took a loss in its latest quarter of $35 million as it shutters the stores and throws away the key to the analog world. Without restructuring charges net loss would have been $6.8 million, much more in line with ONSALE's $4.5 million. EGGS revenue from ongoing operations was $30.5 million, meaning its Web presence seems to be gaining buyers.
Egghead.com's list of email addresses grew to 1.6 million and its auction site, a rival to ONSALE, surpassed 100,000 registered bidders on April 7, 1998, 9 months after its inception. ONSALE reports 535,000 registered customers, up 28% percent from the previous quarter.
Cash positions for both firms looks relatively strong with working capital of about $50 million each, although the Internet etail space is increasingly becoming a very deep pocket experience (or out of body depending on the market). Consider that Amazon.com just placed more than $300 million in bonds to a very eager crowd of investors for Internet-related junk bonds.
We would expect ONSALE to try that route soon also and maybe Egghead if ONSALE can pull it off.
To go global with etail we believe is a $500 million effort through regionalized and local language versions of the storefront. Another way of doing it would partner with in-country powerhouses and then take that effort public as Yahoo Japan did with Softbank.
In Egghead's favor we believe that its decades of selling goods and interacting with customers is extremely valuable "real world" experience in knowing customer habits and nuances.
We also think EGGS could benefit from the growing Internet in etail stocks. The latest example is the tremendous hype surrounding music seller KTEL (NASDAQ:KTEL - news) and others, although KTEL does own much of its music catalog (translation: better margins).
The question is "can Egghead translate its bricks and mortar knowledge into a Web-based gateway to sell computer goods and auction items?" Our hunch is yes. And EGGS may be one of the last Internet etail stocks that we believe may be undervalued compared to its peers.
Check the side-by-side comparison:
fnews.yahoo.com
Dated: May 8, 1998 |
