Egghead is Past Chicken & Egg Stage

Its latest quarterly results show 100% Internet-based e-tailer
(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: Vs.




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$ 18.02


(c) 1998 Mecklermedia,; 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.’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 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.

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