The real issue with eMachines
eMachines, a pioneer of low-cost PCs, actually reported a fourth quarter profit and has strong brand recognition. But investors should be wary of this long-in-the-tooth initial public offering.
eMachines is offering 20 million shares expected to price Thursday night for trading Friday. The price range is $8 to $10 per share. The company initially filed with regulators to go public in August. In January, eMachines acquired FreePC, the brainchild of Bill Gross' Idealab!, which subsidized the price of a PC with Internet access and advertising. eMachines scrapped the FreePC business model, but will use the firm's expertise to gain advertising and direct marketing revenue.
Analysts say the investment bank may have a tough sell. "If the IPO doesn't have an upward price revision, or if there's a price cut, it may signal a problem with demand," says David Menlow, chief of IPOfinancial.com.
The PC maker said it will leverage FreePC's model by dropping the free PC but continuing with the streaming ads on customers' screens. "This combination extends a Web-based portal business model to the hardware itself," according to company filings.
That plan sounds impressive. Couple eMachines' ambition with its Idealab! and America Online partnerships and you may even be convinced to buy into the IPO.
The risks cited in eMachines' prospectus, however, tell a different story, and Menlow says eMachines' IPO could mirror that of Buy.com -- a big business-to-consumer company that did well on the first day, but quickly fell.
As for the financials, eMachines reported pro forma 1999 sales of $815.5 million and a loss of $84.5 million. Sans FreePC, eMachines reported sales of $814.3 million and a loss of $5.7 million. Handing out free PCs and Internet access doesn't do wonders for the bottom line.
The real issue with eMachines, however, could be the revenue breakdown. Nearly all of the company's revenue comes from PC sales. Internet revenue was only $3.2 million for 1999, including FreePC.
That means eMachines is just a low-margin box maker and competition is fierce with the likes of Dell Computer, Gateway, Compaq Computer, Hewlett-Packard and Apple Computer. Many of these PC makers offer Internet access deals and low-cost machines.
eMachines also competes with Microsoft's WebTV and other Net appliance makers.
Aside from the competition, discussions of eMachines lack the key IPO buzzwords. Business-to-business is the clear kingmaker in the IPO market. eMachines is a business-to-consumer company. All one has to do is to look at the stocks of e-tailers to see what Wall Street thinks of B2C. And the final reason to be skeptical about the eMachines IPO is pure supply and demand. After the IPO, eMachines will have 144.7 million shares outstanding. There's too much supply here. For reference, Buy.com, has 129 million shares outstanding and a smaller float.
What's your take on eMachine's future? Let me know in the talkback below.