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Egghead is Past Chicken & Egg Stage

Its latest quarterly results show 100% Internet-based e-tailer Egghead.com (NASDAQ:EGGS) 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).

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. On May 7 it closed at just over $9.

Check our exclusive side-by-side comparison:

Egghead.com Vs. ONSALE.com

  EGGS ONSL
Shares out 20.97 18.70
Share price 5-7 $9.38 $25.06
Market cap $196.57 $468.62
Working capital $49.72 $55.29
Long term debt - -
Enterprise value $146.84 $413.33
Revenue    
Latest Q $74.51 $40.17
Losses latest Q -$35.04 -$4.51
Rev. from ongoing ops $30.50  
Annualized ongoing $122.00 $160.68
     
Revenue multiple    
Annualized/enterprise 1.2 2.6
     
EGGS @ ONSL    
multiple $ 18.02  
(c) 1998 Mecklermedia, Internet.com; all figures in millions except per share and multiples

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 e-mail 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 e-tail 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 then maybe Egghead if ONSALE can pull it off.

To go global with e-tail we believe is a $500 million effort through regionalized and local language versions of the storefront. Another way of doing this would be to 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 interest in e-tail stocks. The latest example is the tremendous hype surrounding music seller KTEL (NASDAQ:KTEL) 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 we believe EGGS may be one of the last Internet e-tail stocks that may be undervalued compared to its peers.