Take Iomega, Please The price of a corporation’s stock is almost entirely based on opinions about future prospects for that company and what people think about the state of the economy. What people think, feel and believe is almost always more important than what the facts are. At first glance, especially to the novice investor, this may seem counter intuitive. Obviously the great growth companies out there like Cisco, Lucent and even, if I may dare, Microsoft have all the fundamental financial health indicators clearly peaked out in positive territory. They have consistent strong quarter over quarter growth, great profit margins and they dominate their respective industries. These are hard facts that no one can deny, but the facts are really secondary to the emotions of the Wall Street herds. The direct reason for their astronomical P/E ratios is that everyone “believes” these corporations will continue to do great in the near future. Of course you might say ‘yeah’, but the reason why people think these companies are going to do well in the future is based upon the fundamental facts of their financial state now. Ok, so I didn’t pick good examples. Let me try again. Take Iomega. This is a company with lots of problems. Late last year as Iomega stock hit its all time high the company’s founder Kim Edwards and some other top honchos sold most their stock reaping millions all the while lying to the public about Iomega’s glorious future profits. Then Kim unexpectedly resigned, the stock plummeted from 29 dollars to 2 over the course of a few quarters. The shareholders sued. Iomega lost focus. There were product delays and problems, such as the infamous Click of Death, lousy customer relations and Iomega became one of the most hated companies in the high tech world. Iomega’s business went into a tailspin with quarter after quarter losses. At this moment revenues are still falling and gross margins have dropped 10 percent from last year due to a larger mix of OEM sales and price cuts. Cash flow looks terrible. It’s down over 30 percent from last year’s level and debt is increasing, up 51 percent from last year. Even the winds of changing technology bode ominously ill for Iomega. Looming on the horizon is a whole next generation of inexpensive CD-R drives and DVD-RAM storage solutions. Sony’s new 200 MB High Capacity Floppy Disk Drive at $199 is also a serious threat. Sony has 30 years of experience at copping market share from the bumbling hands of American corporations. Iomega must seem like a babe in the woods to them. Nor has Iomega R&D found any way to reinvigorate it’s top line which has now been largely commodified as an OEM, low profit margin product. The best they could come up with is the Clik!Drive, which is really just a small Zip disk that holds less than half as much as the Zip but can fit into digital cameras and Type II PC slots. It’s still too early to tell whether Clik! will save Iomega or become Iomega’s Clik! of death. So what’s the rationale for the fact that Iomega’s stock is up about 300 percent since October? Well, they lost their main competitor to bankruptcy. SyQuest died last week. (Insert violin sound here.) That stimulated an undeserved 60 percent jump in Iomega’s equity value in one week. In fact, some analysts think SyQuest might actually gain market share for a moment during death throes as it puts on a fire sale of SparQ drives. This will further deepen the next quarter loss for Iomega. SyQuest users and the third parties that make SyQuest storage disks will still be around for some years. Rash investors may be counting on the addition of SyQuest’s business to boost Iomega’s bottom line in the long term. In truth, SyQuest’s market share was very small (a few hundred thousand end users) and can’t make much of an impact on Iomega’s bottom line. The problem is that the removable storage market is crowded with all sorts of solutions and is not as big a market as Iomega and others originally assessed it to be. SyQuest’s own optimistic projection of the market demand for removables was the main reason they over invested in production and fell into irredeemable debt. The recent manic rise in Iomega’s stock value is an example of how the market responds to irrational emotional forces rather than “just the facts, ma’am.” People have misplaced the significance of SyQuest’s bankruptcy. Since both Iomega and SyQuest had essentially the same business plan, it can’t be a good thing that one of them failed. It’s a model much like Gillette’s cheap razor and expensive blade strategy. They sold the disk drive units cheap to create an installed base and then tried to make up the low profit margin with overly expensive disks. It failed for SyQuest and Iomega is approaching a solid year of red ink. Iomega has only one ace left in the hole and although I wouldn’t place my money on it, there are some intriguing possibilities. Iomega has introduced the Zip Drive in non-computer machines. The big plan is to put the Zip directly into printers, scanners, set-top boxes, medical devices and digital sound synthesizers. MicroTek, Lexmark, Stryker Endoscopy, Roland and WebSurfer have all signed up. The possibilities are limited only by the imagination and by the fact that 100 MB is increasing becoming too small a size to be useful in a world of multi-gigabyte hard drives. The potential for product over-hype has come full circle with Iomega back to the 1996 glory days when Iomega’s heady market success seemed to suggest that Zip Disks were going to populate the earth like floppies. Only with the Zip, there’s just one company reaping all the profits. Iomega looked like a gold mine to investors, the Cisco of the removables. It didn’t happen then and it won’t happen now. Postscript: In the past few days it took me to write this article, Iomega’s stock has steadily declined from it’s inflated high. The uninformed investors who drove up the price after the SyQuest failure did some homework and cashed out quick. That leaves only the market savvy short traders who understand how to take advantage of irrational price swings to make a fast buck in a fickle market.