As investors, we’re always hoping for large profitsyou could even say fat
profits. So why not look at a company that has such success in its name — Fatbrain.com (FATB).
The name suggests success and after a further look, investors will agree that this company is a long-term winner. Fatbrain.com maintains two brick and mortar retail stores in Silicon Valley, an e-commerce Web-site, and roughly 340 co-branded/customized intranet stores. Reporter@Large supports the company because of its current market value, business focus, business-to-business (B2B) premium, eMatter initiative, scalability and strong investor backing.
Current Market Value
The estimate for total revenue in fiscal 2001 ranges at around $90 million. Fatbrain.com currently trades at 18-7/16 with a $210 million market capitalization. So FATB, a market leader and strong B2B player, trades at roughly 2x next year’s total revenue. Almost inconceivable but of-course attractive in today’s Internet stock marketplace. Other market leaders such as Yahoo! (YHOO)
and eBay (EBAY)
trade at earnings/revenue multiples in the range of 40 and beyond.
Business Focus
Fatbrain.com sells professional publication resources in the form of books, training materials, product manuals and research reports. Unlike sites such as Amazon.com (AMZN)
which try to cross-sell additional merchandise. Fatbrain delivers
information publications and mission critical services to business
professionals. Period.
An attractive market: US Bancorp Piper Jaffray estimates that there are approximately 12 million technical and scientific professionals worldwide, up 50 percent from 1997. In addition, the investment bank estimates that the overall information resources market for all professionals will reach $34 billion by 2006.
Take a trip to the company’s home page and you’ll see their Linux Library, an e-commerce library offering all Linux related book titles. This is a good example of Fatbrain’s concentration on technology experts (the company also currently targets business, finance, math and science experts). So tech-heads can come to Fatbrain and buy specific Linux books and manuals.
Now, consider the company’s new eMatter initiative which allows anyone (amateur or professionals) to write and effectively publish his works online at Fatbrain.com. I suddenly begin envisioning a network of Linux users/programmers — call it a developer network. That’s what Larry Augustin, CEO of VA Linux Systems (LNUX), envisioned when he bought Andover.net for about $900 million. Fatbrain’s position in the corporate services market, e-commerce offerings and potential user base at eMatter could very well become a developer network, servicing the corporate Linux space.
B2B Premium
For as well known as Fatbrain is as an etailer of professional publications, there’s an even more interesting story. Eighty-five percent of Fatbrain.com’s revenue is courtesy of its corporate services, which are in
effect B2B applications. Dubbed as Information Exchange, they are a suite
of B2B applications that help businesses produce, manage, market and
distribute corporate resources/information.
Here’s the run down on the Information Exchange Suite
1) Custom Online bookstores: FATB provides businesses with
co-branded/customized intranet-based bookstores. This enables employees and
targe
ted users to gainaccess to specific knowledge resources quickly, via
an outsource solution. Microsoft
Corp. (MSFT)
has already partnered with FATB to create a total of six customized
bookstores. The two most recent stores were targeted to Microsoft Office
and Microsoft Certified Solutions Provider employees and users. Employees
don’t have to leave work or spend too much time finding the resources they
need. In addition, managers can easily utilize a Web interface to organize
and approve purchases. So Fatbrain helps businesses save a lot of the costs
associated with time and labor, while improving efficiency. The stores also
create additional revenue streams for companies aiming to target corporate
clients and customers.
Fatbrain currently hosts roughly 340 co-branded corporate sites. This
number includes 200 of the Fortune 1,000 companies. IBM, Novell Inc, Palm
Inc. and Sun Microsystems are just some of Fatbrain’s customers.
2) Print-on-demand Program: Fatbrain offers to print, warehouse and then
deliver hard copies of corporate publications to employees, partners or
customers. This way businesses can take advantage of Fatbrain’s brand
reputation, customer base and reliable distribution system. The program is
FATB’s fast growing business segment and now makes up over 9 percent of the
company’s total revenue. Importantly, the business segment has margins 2-3
times that of the etail book business. According to Piper Jaffray, the
margins can run as high as 42 percent — that’s fat.
3) Digital Publishing: This is the company’s Enterprise eMatter solution,
which lets businesses publish and securely distribute documents in digital
format. Digital documentation cuts production costs and users now have the
choice of paper vs. digital (print-on-demand vs. eMatter enterprise).
Through this channel, Fatbrain.com is pioneering the business effort toward
a truly “paperless office.”
“We basically focus on getting eyeballs to our site in order to sell 3rd
party published works via a business-to-business relationship” says Dennis
Capovilla, a Vice President at Fatbrain who took time to speak with
Reporter@Large. “The first step for us was books, training products,
manuals etc. The second step happened because we realized that all these
companies we work with, publish — they have a ton of content they want
published. So they’re now outsourcing that to us. We’ll produce lets say
Sun Solaris documentations on a print-on-demand basis — we’ll stock it and
deliver it — it’s really an end-to-end solution. So lets say an employee
wants to view an internal company document, we’ll deliver it in digital or
paper — we handle it all.”
Capovilla certainly painted a nice picture of Fatbrain’s dominance in
providing a complete outsource publication management solution. The key
thing to realize is that while there are competitors within each niche, no
company, except Fatbrain, offers a complete solution. Businesses save time
and money by going to the company that can handle all specific functions via
one transaction. This is Fatbrain’s B2B value add.
eMatter Initiative
Launched last October, eMatter allows amateur and professional writers to
post their works on Fatbrain’s site. Participants set a price and split the
fee 50/50 when a user downloads their work, essentially purchasing the work.
This new system of publishing and distribution directly parallels the
revolutionary feats of MP3.com. Authors can now bypass publishers and use
Fatbrain as an instant global distribution channel. In the same sense,
authors can create a buzz at Fatbrain.com to find potential publishers. A
number of famous authors, including Richard Bach, and high-profile
publishers, including McGraw-Hill and The Industry Standard have already
signed up to
provide content through eMatter.
I like the idea of authors offering previews of chapters. Of-course the
opportunity is compelling as well for short story authors. Hey, why not
publish your own investment research reports?!
Highland Capital Partner’s Keith Benjamin has said: “I really view eMatter
as an entirely new companythis could be a huge business.” The company and
analysts are actually touting eMatter’s market opportunity at $100 billion.
With no competition in the immediate space, Fatbrain will have to spend a
lot of money now to create barriers-to-entry and form a solid community of
buyers and sellers. Customer acquisition costs will only rise. Fatbrain’s
first mover advantage in this specific space should excite investors.
Scalability
Fatbrain.com is one of the finest examples of a scaleable Internet company.
The company specializes in two specific business processes: etailing
knowledge publications to professionals and providing B2B corporate
outsourced solutions. Fatbrain will take 1 slice of the pie at a time. The
company first focused on the technology industry but has since added the
business, finance, math and science industries. A horizontal business model
with a vertical attack — the most successful model type on the Web.
Investors
Only weeks after leaving Robertson Stephens as the firm’s Senior Internet
Analyst and Managing Director, Highland’s Keith Benjamin placed a $10
million investment in Fatbrain.com. Two weeks prior to this investment,
Vulcan Ventures (the venture arm of Paul Allen’s Internet empire) agreed to
invest $20 million in Fatbrain. There is a reason that Fatbrain is attracting
attention and money from leading VCs and Internet pioneers — perhaps we should
all follow suit.
Pacific Crest initiated coverage on Feb. 28 with a “strong buy” rating. The
company trades at a substantial discount, has shown tremendous growth in its
B2B channel, will have long-term monetary success with eMatter and has the
ability to scale its model across virtually all-professional industries.
Investors at current levels will likely see fat profits.
Do you agree with Fronefield’s analysis of Fatbrain.com? Is this stock ready to jump? Discuss it here
