Dueling Fools

Dueling Fools

Bull Argument

By Rick Aristotle Munarriz (TMF Edible)
November 24, 1999

Panning for consistency on Wall Street is like sending a chameleon into a Crayola box. Things change. Iomega is living proof of that roller coaster sentiment. In the early 1990s the company was relegated to the trash heap. It was losing money churning out Bernoulli high-end data storage drives and Ditto tape backup devices.

All that changed in the spring of 1995 when the Zip captured the imagination and pocketbooks of computer users looking for decent-sized portable capacity. Many people I know, including our bear Paul Larson, went along for what turned out to be an amazing run over the next year. Then the chameleon stumbled across the maroon-colored crayon.

Since the stock's peak in May of 1996 the shares have been cast back into the junk pile. The losses have moved back in. Pessimism has called first dibs on the top bunk.

But take a whiff and you'll smell 1995 in the air again. Early 1995. It's that eau de apathy that leaves so much in untapped upside on the table. The big difference this time around is that Iomega has already earned that upside. Earlier this month the company sold its 30 millionth Zip Drive. I remember two years ago when America Online (NYSE: AOL) landed its 10 millionth subscriber around the same time that Iomega hit the same mark in drive sales. Since then AOL's reach has doubled while Iomega's reach has tripled.

It is amazing growth, but apparently the investing community is content on discounting a standard. Zip has become a fixture with OEMs and in the retail aftermarket. Unbelievable! Even in jubilant times there was always the possibility of SyQuest or the LS-120 drive making a run at Iomega. They failed. Iomega has won. The chameleon has landed on cobalt blue -- and no one seems to care.

Jaz, Zip's big brother, has also delivered in the high-end niche market. Both product lines have also bulked up as the Jaz went on to double its gigabyte capacity while a 250-meg Zip was introduced.

Iomega was never about stagnancy. The company had always prided itself on listening to its customers and giving them what they wanted. That is why it was amusing to hear so many critics voice their concerns about how optical storage would hurt Iomega.

Sensing the hot trend toward rewritable compact disc drives, the company rolled out its ZipCD over the summer. While it's not as lucrative and exclusive as the Zip, it establishes the company as a significant player in yet another storage medium solution.

Just like Clik! -- another new gizmo from the "My Stuff" people of Utah. The compact memory solution (just 40 megs, but in a tiny two-inch square) has a lot of potential in the growing fields of digital cameras and PDAs (personal desktop assistants). The product also has a stand-alone card version that can plug directly into laptops. With 30 times the capacity of a standard floppy disk, and laptop presentations crying out for simple and portable data transfer, the Clik! clique is growing.

With such potent product lines one has to wonder why the stock is trading so cheaply. I'm sure Paul has his theories. I'm dying to hear them, quite frankly. To me it appears to be simply another case of "once bitten, twice shy" down a rabid Wall Street. Apprehension splashes on that eau de apathy pretty thick, you know.

The only two legitimate worries, profitability and management, are now being addressed. As jaded as the few remaining analysts have become, none expect Iomega to earn less than $0.30 a share next year. It's like a high school gym class the way P/E and teens fit this bill now. Dataquest projects that segment sales will climb by 80% from the 1997-1998 period to the 1999-2000 period.

That's the sound of money. That's the sound of the family of 180 million Zip disks already out there looking forward to even more siblings in the years to come.

But what about management? It's been a revolving door at the top full of Kims and Jodies. This month, Bruce Albertson has come aboard as president and COO with the credentials to turn Iomega around. His strength at General Electric (NYSE: GE) was in establishing appliance brands overseas. Perfect. Most of the non-Zip products, including the video editing Buz gadget and especially the ZipCD, suffer from a lack of peer differentiation. Malaise breeds a sector that becomes commodity-rich and margin-poor. Like dishwashers. Like refrigerators. That is what Albertson achieved at GE. He brought vanilla things to life. So, give him a chance. Even the Ditto line might succeed in setting itself apart from cookie-cutter equals.

This is an exciting time to believe in Iomega again. With a marketing mastermind at work, it appears as if Iomega is about to deliver. And, lookie, the chameleon has just stumbled onto green.

Next: The Bear Argument