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November 30, 1998

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Subject: BAMM is highly overvalued and a great short
Author: think111

Full disclosure first - I have shorted this thing. I didn't do it lightly, as I am a big believer in the Web, with yhoo, amzn, aol among my biggest long positions (and the first two approaching ten-bagger profits).

Fundamentally, anyone buying or already owning bamm stock needs to consider: How successful is bamm going to be in actually capturing online customers? Barnes and Noble (bks) has an excellent site AND has spent lavishly on TV and other advertising in order to try to catch amzn, but is still being outsold by 9 to 1 online by amzn. Being early on the web is absolutely critical, and that is one reason that bks is having such a tough go of it relative to amzn. bamm is even later to the game. How is bamm going to distinguish itself from the clutter of also-rans in the online book business? Low prices are not enough. On Yahoo, go to "Business and Economy: Companies: Books: Shopping and Services: Booksellers" and you will see HUNDREDS of online booksellers, some with lower prices than either amzn or bks. How many people have ever heard of, much less bought a book from 2MillionBooks, A1Books, AABBA Discount Bookstore, All Book Web, All Direct Books, alt.bookstore, America's Bookstore, or AnyBook International, to name but a few? WHY ISN'T BAMM, WITH THEIR LATE ENTRY, JUST GOING TO BE ANOTHER ONLINE ALSO-RAN, with minimal online revenues compared to amzn?

At Friday's closing price of 39, bamm has a $679 mil market cap. Barnes and Noble (bks) has a $2.37 bil market cap, or only 3.5X bamm's. But bks has revenues fully 8.5X larger, not 3.5X, AND:

1. bks is earlier in getting its act together on the web.

2. bks has greater brand name recognition in terms of capturing web customers

3. bks has greater economies of scale (which translates among other things into puchasing books at lower prices)

4. bks has at least 8.5X times the ability to afford mass-market (TV, print, radio) advertising to draw customers, especially with Bertlesmann behind them

5. bks' core business is healthier, with Q3 comp store sales up +4.5% versus a DECLINE of -3.3% at bamm

6. Another way of looking at the comparative valuation: bamm sells at 2.0X trailing 12 month sales, bks at only 0.8X, despite bamm being less profitable (3.8% trailing 12m operating margins vs. 4.1% at bks, even with bks spending massive sums on promoting

ANY comparison of bamm to amzn is specious, as:

1. bamm has a core bricks and mortar-based book business which gets hurt as bookselling migrates to the web; amzn does not

2. bamm will not be able to become a significant enough player (bks has 4.5 mil customers already) to leverage into other markets such as music CDs, videos, and gifts, as amzn already has

3. amzn is valued more highly than bks for a simple reason: despite bks' higher current revenues, bookselling is migrating to the web, and amzn, with its early entry and massive base of existing online customers, is going to be difficult to dislodge. bamm, for all the reasons above, is going to have even less success than bks on the web.

OTHER things to note:

1. amzn and bks already have the distribution channel largely locked up, with preferred/exclusive bookselling ad placements at aol, netcenter, msn, etc., not to mention "associates" type programs. Where is the available web real estate for bamm to gain traction?

2. bamm's "enhanced" site is still not nearly as rich as either amzn's or bks'. Just check out the sites, or ask a book-loving friend to do so.


Even though bamm has 11.7% of bks' revenues, it should have LESS than 11.7% the market cap. bamm is LATE to the web, lacks the deep pockets of a Bertlesmann partnership, has a weakening core business to begin with, and will end up LOSING share of the (only 5% growth) total bookselling market as the market moves increasingly to the web. bamm will likely end up with less than 11.7% of the online book revenues of bks (and less that 2% of amzn's revenues). 11.7% of bks' market cap would mean a stock price of $16, but given their poor positioning, lateness, and lousy core business, $5 to $10 is probably more appropriate. Salomon Smith Barney on Wednesday afternoon put a $6.15 value on the shares, and downgraded it to "underperform" as well. (Since someone on a previous Silicon Investor post called this a lie, let say that the analyst is Maureen McGrath [...].

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