Post of the Day
February 25, 1998
From our AOL
Subject: My thoughts on Nomai
Upon reflection over the last 24 hours, I have come up with a few thoughts that I think are relevant as to whether or not to stay invested in Iomega. To simplify this into a single post is very difficult and I welcome any critical analysis. (Best read on full screen)
First, I am not a 'teckie'. A year ago I had never heard of the Zip drive or any other removable drive other than the floppy. I have made my money and built my client base on things that I can understand (I am a stockbroker). I really never cared too much about tech stocks other than to stay long the large multi-billion dollar companies like IBM, MSFT, INTC, T, HWP, etc... My beliefs were simple, if the company was large and powerful they could dominate when they were right (of course I have to like the theme), and they could fix their problems when they were wrong. (IBM is one of my biggest winners). I try to buy on the dips or when it appeared that there was an overreaction to the 'current news'. I usually stick out a losing situation and almost always they have come back. Maybe I have been lucky, but I haven't been pounded over the years with too many 'dogs'.
I was introduced to Iomega through research that I had received through Joe Beseker at Emerald. I usually find most story stocks to be worthless, so I discounted the information. After a few more reports, I finally got involved because I thought that Zip definitely had a shot. I soon realized that internet hype board called 'Motley Fool' and after a few months I was hooked. I found out not only what a Zip could do, but also about the many other products that IOM produced. You guys convinced me that IOM was a great company, had great vision, and was about to have the next great product to hit the mainstream. I spend many hours trying to figure out the 'whys' and 'how comes' and I believe that the cumulative effort of this board had painted a 'true picture' of the facts.
My assessment of the current month's news is as follows (as usual, I would like your input):
1) Iomega is not a guaranteed investment (Many risks, but possibly big potential)
a) Nomai- probably the biggest factor because they introduce the most uncertainty about the future of IOM's model and revenue stream. Two issues are short-term earnings stream and long-term viability stream.
b) Sony- a very large factor since they are the only company left that can stop Zip from being standard (not counting IOM of course :-(). Big issues are whether they can price their drive at a level that can stop Zip momentum, and whether they can get OEM's to incorporate the system.
c) Iomega- Even though IOM has grown from 100 million to 2 Billion (as Keeler posted the other day), can current management handle the future growth. This includes everything from production to investor relations, to Zip-clicking PR. Big issues are whether they are now out of their league.
d) current earnings may be down to .07 to .09 for the quarter.- This is what the analysts are worried about and I am sure quite a few on this board as well. The issue is whether or not Zip and Zip disks are still moving at the same pace and whether the tie ratios are declining.
After becoming almost glued to this board over the last 30 days trying to comb through every news release, analysis, promotional material, competitor information, etc..., I have concluded a few things....
#1 Nomai is the uncertain element that keeps everything else from being handled. Whether or not a company can steal the revenue stream from IOM is the central issue in every issue above. I am not talking about short term, I am talking about over the life of the product. If the Nomai disks (or larger companies) can be freely manufactored without paying IOM one penny, then all the other issues become relevant. If IOM can win partial victories that can keep pirate disks at bay, then this may suffice. However a complete loss would impare their ability to fight because disk profits are their greatest asset. What is the chance? I don't know. I would like to know the answer. I also would like to know the score of the Super Bowl before it is played. Unfortunately no one may be able to tell us what the odds are. We can guess and we can even make an educated guess. That is why IOM is not a guarantee. To those that get mad at IOM, Kim Edwards, the legal system, etc...(I was one of you last night), I would suggest that you come to terms with the fact that IOM is a risk and may or may not be worth it depending on your time frame. In fact I think that the stock would be between $15 and $20 right now if the Nomai situation didn't exist.
Why does the uncertainty of the Nomai issue affect IOM so much right now? Look at all of the other issues and they are either handled by the excess earnings that the ever-increasing installed base of Zips can spit out or by short-sightedness of the market because it can't project five years out.
Almost every Sony issue that I have seen info on has mentioned that Sony isn't a factor because they will either be priced too high or IOM can sell Zip drives lower (because IOM gets 100% of disk sales vs. Sony 50%). The Nomai situation, if handled successfully, would give IOM many HUNDREDS OF MILLIONS OF $'s to finish the war. Even though there may be a fight, I believe that the installed base of IOM plus the annuity $'s to fight with would be enough to push ZIP through.
What about current earnings you say? Wouldn't they suffer if IOM had to fight this battle? YES, but the stock price wouldn't suffer over the long term because the analysts could look out in time and figure the earnings stream IOM could produce. I will answer that thought with this question: How much would you pay for a company that has a 'lock' on the floppy replacement market and to the disks sales that result? When the analysts realize that ZIP has won, they WILL LOOK 5 YEARS OUT. As we near that magic point of inevitability, different analysts will realize at different times that Zip has won. This will render the current earnings useless when calculating the value of their franchise. In fact, I think the current price of IOM is caused by the fact that the normal believers in 'ZIP is standard camp', can't say with certainty that this means anything because a loss to Nomai would make this victory hollow.
In conclusion, I think that many on this board may tend to over-analyze (I definitely do) and this creates a sense of understanding that can be detrimental to one's financial health. While I think this board is great and can inform us as to the facts, I think that also it gives us the feeling of 'knowing' the answers to all of the questions. This can be bad for both the overly excited good times (too long) and for the overly depressing bad times (not in). I am a firm believer that when you know the score the price will already reflect it. I don't think the market will let you in cheap after a big victory or after Zip has clearly reached 'the standard'. For this reason I would caution everyone to weigh the risks and make your bet, but don't change strategies on every piece of information. You all cumulatively educated me on this company and its products, and I would hate to see you locked out when the market sentiment changes. (As proof look at today's action...Nobody predicted that last night!)
P.S. The reason for part of this story was that I had a client that told me today to "get him in under $10 as soon as IOM wins the Nomai lawsuit". I had to explain to him that the market may be $20 before this outcome was known. He said he didn't think about the stock being higher until that issue was resolved. Upon reflection he decided it was "worth it to be in now and not wait, because I don't want to take the chance of not getting in under $10"