RealTime IT News

The Real 800-pound Gorilla: K-tel Stock Proves the Internet's a Jungle

What do Koko the chatting gorilla and K-tel have in common? The "anything goes species" out there in Internet land.

America Online (NYSE:AOL) reported that the chat event it held the other day for its members and Koko the gorilla, who speaks sign language, was one of the top chat events in its history, ranking fifth on AOL's all-time list. Some 8,000 people chatted away on Earth Day with the beast, leading us to wonder: Has AOL finally found the killer ap(e)?

The chat was for good cause and certainly notable in the history of humankind, some 13,000 questions came typing in at Koko who answered away as fast as gorilla hands can sign language. AOL called it the first "inter-species" chat event.

The notoriety highlights the jungle-like nature of Internet stocks lately as investors and speculators look for the latest stock that could run. There's a few examples of this although today we focus on K-tel (NASDAQ:KTEL), which has been the "stock de moment" ever since a few weeks back when K-tel announced plans to launch a Web site to sell music. K-tel shares rocketed up the charts from a $6.625 per share stock on April 8 to $49.50 per share April 22 on the fervor.

On April 30, K-tel closed at $37 and some change, the day before K-tel debuts its Web effort, K-tel Express (www.ktel.com) which launches today.

K-tel Express sells music, an extension of what K-tel has been doing for decades on TV. You know those compilations, special disco sets, soundtracks, etc. Anyone who wore polyester in the 1970s knows who K-tel is. K-tel Express is the late 1990's version, leveraging the Web's global nature and immediacy to sell more music.

While the stock run from $6 to almost $50 in the space of a few weeks seems outrageous, if you look at KTEL's small shares outstanding and float, then it may not seem that ridiculous. K-tel market capitalization is about $130 million with 3.8 million shares out (fully-diluted is about 4 million shares out).

Because of weaker earnings through traditional channels the move to have a Web store seems natural for K-tel (natural for any retailer actually).

On February 4 K-tel reported that its December '97 quarter earnings per diluted share were $0.11 vs. $0.45 for the same period a year ago. Six-month diluted earnings per share of $0.40 vs $0.68 for the same period a year ago. Revenue for the December quarter was $23.2 million vs. $17.1 million for the same period a year ago and for six months to then was $48.4 million vs. $32.8 million.

On an annualized basis K-tel revenue looks like it could reach $100 million, meaning that before April 9 this stock traded way under 1x sales. Basically it was ignored, perhaps rightfully so. With a Web site launch does that justify K-tel's 10x gain in two weeks? Part of that is the 900,000 share float and near 80% of shares out held by insiders.

Having looked at the balance sheet and the company's position, and gotten a glimpse at K-tel Express, we think that the Internet indeed is a crucial link to the future of the firm. But K-tel looked like an undervalued stock before it mentioned anything about the Internet. So a run on value was perhaps in order regardless of its plans.

The natural assumption (which we think is premature) being made now is that K-tel should be valued in line with CDnow (NASDAQ:CDNW) or N2K (NASDAQ:NTKI), both 100% Internet-based music e-tailers. Both trade at multiples of trailing sales greater than 30x and have market caps about $300 million each.

While we applaud K-tel's recognition that the Web is an indispensable place to conduct commerce, we think that in the absence of any distribution, marketing, or brand awareness-enhancing deals on the Web itself causes pause. Yes, there are stirrings. A deal with RealNetworks (NASDAQ:RNWK) announced on April 30 will allow users of K-tel Express to make their own CD compilations, but that's something already being done by EZCD.com and musicmaker.com.

In its favor, though, the K-tel TV promotion and awareness of K-tel Express through its existing promotions outlets in the U.S. and Europe could boost its profile and feed the Web effort, however, beyond those who cannot afford to do TV.

Until K-tel cranks up the volume on its Web site with sales results we think the issue remains speculative from its existing trading level. If it can "go Web" with sales, then a 4x or 5x revenue multiple on a year out basis wouldn't be farfetched.

The question now (and maybe Koko can assist in the answer): Is K-tel suddenly an "Internet stock" because it launches a Web site? Plenty of direct marketers have Web sites. Let's see how the next four quarters go and if K-tel can match CDnow or N2K Web for Web.

That's the metric that matters and we'd perhaps be witnessing more than a gorilla wannabe in the midst.