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EGreetings: Investors Getting the Message

Egreetings (EGRT) had its IPO in the middle of December last year. The IPO was priced at $10 and shot-up to $14.25, but then closed at $10.56 on its first day of trading. Now, the stock is trading at $10-1/16.

Then there was, of course, Blue Mountain, which is a major competitor. Excite@Home purchased the company for a cool $780 million. What's more, if Blue Mountain achieves certain performance targets, there could be an additional $270 million in payments.

Despite this, Egreetings has a valuation of about $346 million. Why the discrepancy? Let's take a look.

One concern is the company's ownership structure. Gibson Greetings was the biggest shareholder of Egreetings. In the deal, Egreetings got key content assets. Actually, 36 percent of all digital greetings sent from the site was obtained through agreements with Gibson Greetings. The agreement expires in December 2002 or, can be terminated if users do not send a minimum of 2.8 million digital greetings in a month and if this occurs within any quarterly period thereafter.

But in November 1999, American Greetings purchased Gibson Greetings. Interestingly enough, American Greetings owns a Web competitor: AmericanGreetings.com. While it is likely that American Greetings will maintain the existing relationship with Egreetings, this is not full-proof.

Speaking of competition, the market is crowded. Such companies as Hallmark and 123greetings.com offer great products, as well as Amazon.com, Microsoft, Yahoo! and yes, Excite@Home (the company accounted for 40 percent of total revenues for Egreetings last year).

There is also concern about the business model. After all, digital greeting cards are free. Somehow, the traffic needs to be monetized. So far, there has been little evidence that the model makes any sense. So far, revenues have been minimal. They were $182,000 for the first nine months of 1998, compared to $1.5 million in the same period in 1999.

No doubt, the site is top-notch, with over 5,000 digital greetings. In October 1999, there were over 5 million digital greetings sent. This is testament to the viral nature of the product.

Realistically, I think digital greeting companies are not good candidates for being public companies. Rather, they seem to be much better fits with other companies, such as portals and major e-commerce sites (like Amazon.com). So, at current valuations -- and selling at a discount to the Blue Mountain -- the company would make an attractive purchase. But this needs to be fast, as the burn-rate is substantial. In the past quarter, the company lost about $10 million and the accumulated deficits is $35.1 million. Keep in mind that Egreetings only raised $55.8 million in its IPO.