Here is an article that was posted on the Individual Investor (Publisher of Individual Investor magazine)Website on 5/24/99:
Is Fatbrain.com the Next Hot Net Stock?
by Director of Online Research Dave Sterman (5/24/99)
Selling books over the Internet has certainly caught the attention of investors. Okay, that's a bit of an understatement. Let's be a
bit bolder. Investors have gone absolutely gaga, cuckoo, bonkers over Amazon.com. (NASDAQ:AMZN - Quotes,
News, Boards)
Sporting a market cap in excess of $20 billion, and with a big pile of debt on its balance sheet to boot, Amazon has some very
lofty expectations to fulfill. But as we have argued in the past, the company doesn't seem to have a clue when it comes to
profits.
A more attractive business model, in our minds, is one that centers around selling books and other goodies to businesses, not
consumers. Consumer sales, when off line or on line, will always be very cutthroat with wafer thin profit margins. But
business-to-business commerce, especially e-commerce, is a much more attractive concept. It's a less crowded field (and
should stay that way thanks to its smaller size), and promises more robust profit margins.
The leading player in the nascent field is fatbrain.com (NASDAQ:FATB - Quotes, News, Boards). And though it is several
rungs down the ladder from Amazon in terms of size, the company holds its own by a number of key measures. For example,
the average order size at fatbrain is $110, versus $25 for Amazon. On each order, fatbrain bags a $15 operating profit.
Amazon, by contrast, ekes out small change on each sale.
When fatbrain came public last November, it carried the stodgy name of ComputerLiteracy.com. Its initial focus, creating
Intranet-based online bookstores for techies at firms such as Sun Microsystems (NASDAQ:SUNW - Quotes, News,
Boards) was soon broadened to appeal to finance and other corporate drones.
Historically, when an employee wanted to order a book or manual to use at work, it would cost $140 to process the purchase
order. But by adopting fatbrain's software and distribution technology, those costs soon dropped to $30 per order.
And this is no small market opportunity. Job-related books and manuals catering to white-collar professionals is a $17.5 billion
market. Fatbrain offers the widest selection around, a key driver of the company's expanding relationships with outfits such as
Oracle (NASDAQ:ORCL - Quotes, News, Boards), Nortel (NYSE:NT - Quotes, News, Boards) and Compaq
(NYSE:CPQ - Quotes, News, Boards). How wide is the selection? Amazon.com offers 61 different books and manuals that
cater to software programmers using SAP (NASDAQ:SAPHY - Quotes, News, Boards) software. Fatbrain offers 221
titles.
Unlike Amazon, which has hundreds of thousands of passive customers, fatbrain users interact with one another through
message boards, posting book reviews and other commentary. 'There exists a real community to this category, even
more so than in the consumer market,' notes Chris Vroom with Thomas Weisel and Partners. 'In our view, effective
combination of content, community and commerce wins everytime.'
As the company has inked more partners, its sales have exploded. The company had $11 million in sales in fiscal (January)
1998. A year later, sales surged to $19.8 million. But that doesn't really tell the story. On-line sales have more than tripled in
the last year, and are growing at a whopping 50% sequentially. Fully half of the company's business comes from repeat
customers, and those customers are buying in ever larger quantities.
The company figures a typical customer is ordering $50,000 worth of books and manuals in the first year, $500,000 in the
second, and $1 million in the third year. Couple that with a surge in new accounts, and the heady sales growth looks
sustainable.
In another bid to kickstart sales, the company is now offering higher margin computer based training through those intranets.
Though just 10% of sales now, CEO Chris MacAskill figures this business should grow smartly in the years to come.
Fatbrain will release results after the close of trading on Wednesday. Vroom is looking for online sales to expand 23%
sequentially to $4.3 million. But his math seems a tad too conservative. Back in January, fatbrain had 78,000 registered
accounts. Now the company boasts of more than 100,000 accounts, a nearly 30% jump. In the last two quarters, the
company's sales have been much higher than forecasts, and this quarter should be no exception.
Bottom Line
Soon after going public last fall, one of fatbrain's underwriting analysts dropped coverage. Since then, the stock has stayed off
of most Internet buy lists. But as Vroom notes, the shares are 'underfollowed, undervalued, and exceptionally attractive.' He
sees the shares climbing from a recent $17.75 to $25-30 in the next 12 months. But if this net stock catches fire, price targets
are irrelevant. |
