A Loser
Iomega Corp.
53.0% Decline
(NYSE: IOM)
www.iomega.com
12/30/97 Price: 12 1/2
6/30/98 Price: 5 7/8

The Company's Biz. As many folks reading this already know, Iomega makes peripheral storage devices for various segments of the computer and electronics community. Amongst its chief products are the Zip, Jaz, Ditto Tape backup, Buz, and Clik! For those not familiar with Iomega or its products, Zip drives and disks are the company's main claim to fame (although Jaz and Ditto aren't far behind).

The Story. Zip revolutionized the removable storage market a few years back by fitting the equivalent of 70 floppy disks into one slightly larger Zip disk. Jaz is a more portly version of the Zip, fitting an entire gigabyte of storage onto one removable disk. Ditto is a backup device that allows users to save all of the crucial data on their hard drive in one fell swoop. Buz is a relatively new product that allows people to do video editing. Finally, Clik! is a much smaller storage device for things like notebook computers, personal digital assistants (PDAs) like Palm Pilot, and digital cameras.

The biggest catalyst for Iomega, though, was Zip. With its sleek design, cool name, and admittedly ingenious functionality, the Zip Drive and Zip disks flew off the shelves. Revenues climbed from $326 million in 1995 to more than $1.7 billion in 1997. The amazing popularity of the Zip, as well as its bulkier kindred, the Jaz, not only set revenues on fire but the stock price as well. On January 3, 1995, shares of Iomega traded at a split-adjusted price of $0.25. That's right, twenty-five cents. So, by any measure at all, this has been a wildly successful company and investment over the past few years. For those of you keeping score at home, even at $6 Iomega is a 24-bagger in just over three years.

Unfortunately, while $6 is still fantastic relative to three years ago, some shareholders are bemoaning the fact that stubs of this once darling stock have been as high as $16 in the past year or so. Many folks who weren't fortunate enough to discover Iomega back in 1995 are sitting on losses and wondering what to do now. Were there ways to avoid this fall? Can Iomega return to its previous lofty perch? Read on.

How Could You Have Seen This Coming? It's always easy, in retrospect, to point to all of the warning signs that a stock exhibited "once upon a time." That said, there were certain things that Iomega did (or did not do, for that matter) that hurt the company. There are also certain general characteristics about the company's business and industry that should have tipped off investors.

First, Iomega's basic business model is the razor and blade model. It was always understood that Iomega would try and make the Zip drive the standard in all computers and profit from the higher margin Zip disks. Given this, it made little sense for the company to spend millions of dollars on a high-profile marketing campaign when it should have been lowering prices for OEM manufacturers, thus shutting out competing drives and sealing up the market. That was probably the largest fundamental error in its business strategy.

Other problems had to do with the nature of the storage business and developments in personal computing. Storage is an incredibly cyclicalbusiness, with vicious peaks and valleys. Stocks soar and swoon regularly. Shareholders in Iomega seemed to believe that the company was not susceptible to these market forces. Also, the average new PC has more than 6.0 gigs of storage capacity, making the demand for removable storage nowhere near as strong as it was when the average hard drive only had 800MB or 1.2 gig. Couple that with the fact that files are passed so easily on the Internet these days and there is less of a need for transportable storage. Yes, the need is still there, but it isn't as compelling as it was just a few years ago. That's how fast things change.

Lest anyone think that I'm playing Monday Morning Quarterback, here is a small excerpt from a message board post I made back in May of 1997:

"I have a zip drive. I have one zip disk. I've had it for a year and a half and I've used it twice for what I would call 'mission critical' applications. But, in both cases, the only reason I used the zip was because it was slightly faster than downloading the file (12 meg) over the network. Even still, the parallel zip took about 15 minutes to copy and another 15 to paste to my drive. Iomega isn't the Second Coming. It's a storage company. Perhaps a good one, but just a storage company. Everything in investing is gauging expectations. You also can't build your portfolio around one stock, and I fear that some people have done so over time."

The Future. If Iomega is to succeed going forward, it must continue to find the "profit zone" that has been so elusive this past year. It needs to better manage its finances, too. With computers becoming fatter and fatter in the storage department (I saw one with 16 gig the other day) and with networks becoming faster and faster, the need to carry your "stuff" anywhere is becoming obsolete. The consumer need that Zip had fit so well has evaporated. I even question the viability of Zip as a standard. And so what if it is? I don't use my floppy drive now; I won't use it if Zip is the standard. But that's just one Fool's opinion. I could be wrong.

-David Forrest (TMF Bogey)

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