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.
[email protected] 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, [email protected] (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.

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