Egghead.com Thinks Up a Plan
Scorned by Wall Street, the retailer finds a classic way to get noticed: Throw money around.
By Suzanne Galante and Cory Johnson
If a disk drive sells in a forest, does anybody care? That's more or less the dilemma facing Egghead.com. Not so long ago, Egghead.com shut down all of its brick-and-mortar stores to re-create itself as a Web-only retailer and auctioneer of software and other PC-related goods. Now it fancies itself a hot Internet stock. The management team thinks Egghead.com ought to be treated like Amazon.com, or eBay, or some other Internet stock with a multibillion-dollar stock valuation. Clearly, Wall Street isn't convinced.
To many on the Street, the name Egghead still conjures up images of a crappy has-been retailer of computer goods. In its previous life, Egghead.com built too many stores and held too much inventory. It had a bad business plan and mediocre executives. The company's contention that all of that is ancient history has fallen on deaf ears. Egghead.com has an image problem that it has not managed to fix.
Despite the company's positioning as a Net-only software retailer, Egghead.com attracted coverage from just a single brokerage firm – an obscure Portland, Ore., outfit called Arcadia Investments. Meanwhile, newer, smaller companies with similar businesses – Beyond.com, Cyberian Outpost, Onsale, uBid – have drawn a crowd of high-profile Wall Street analysts.
"It's a company that always had some promise. It's got a good brand, dedicated customers and it's tried to make do with a series of tough challenges," says Arcadia analyst John Taylor, who gives the stock a "market perform" rating. He says Egghead.com gets overlooked because it "has not been real communicative with the Street."
It certainly seems to have done something wrong. In the first 10 weeks of 1999, Egghead.com's shares tumbled more than 40 percent. During the same stretch, TheStreet.com Internet Sector Index shot up 30 percent. Egghead.com's history has been a tale of woe. And there has been no one on Wall Street to provide comfort.
In an attempt to fix the problem, Egghead.com more or less decided to buy itself some high-profile Wall Street coverage. On March 12, the company raised $64.8 million in a secondary stock offering underwritten by Hambrecht & Quist, BancBoston Robertson Stephens, Prudential Securities and U.S. Bancorp Piper Jaffray.
The way things work on Wall Street is that when you sign on for certain investment-banking services, you receive generous and forgiving analyst coverage in return. It's an unwritten rule, but it tends to hold.
So you can guess what happened. One day after the secondary offering, Hambrecht & Quist analyst Genni Combes initiated coverage of Egghead.com. Her rating: "Buy." In making her recommendation, Combes described Egghead.com as "a leader in off-price computer-product retailing," with more than 750,000 customers. Combes expects revenues to ratchet up from $143 million in fiscal 1999, to $200 million in 2000 and $370 million in 2001. The recommendation gave the stock a 4 percent lift.
Although buy ratings of this kind are highly predictable, they for some reason seem to assuage the concerns of nervous investors. In November, when EarthWeb drew buy ratings on the same day from J.P. Morgan and Volpe Brown Whelan, the underwriters of its IPO, the stock immediately climbed 58 percent. When Robertson Stephens started coverage of eBay with a buy rating last October, the stock jumped 26 percent – and soared another 62 percent on subsequent recommendations from Goldman Sachs, BT Alex. Brown and Donaldson Lufkin & Jenrette, its other underwriters. Similarly, Prodigy rose 13 percent earlier this month when underwriters ING Baring Furman Selz and Bear Stearns picked up coverage with buy ratings.
Prudential, according to a spokesman, expects to add coverage of Egghead.com in the coming weeks. You can bet it will issue a buy rating. And when it does, the additional coverage will likely push the stock higher, says Christopher Lord, a buy-side analyst for Amerindo Investment Advisors. Net investors are always looking for a reason to buy, he says, and the added attention "makes people more confident."
The forthcoming reports may finally address some questions that Egghead.com fans have been asking for a while: Why, for example, does the company have such a relatively low valuation? Egghead.com trades at less than three times its trailing 12-month revenue of $180.96 million. By comparison, Beyond.com trades for more than 18 times trailing revenues. Why the discrepancy?
"I wonder that all the time," says Arcadia's Taylor. "It's an incredible irony." Irony, or a history thick with failure yet to be rewritten.
Suzanne Galante is a staff writer and Cory Johnson the West Coast bureau chief of TheStreet.com.
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