Why Egghead May Be the Poor Man's Internet Play

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In the six weeks since announcing that it was dumping its humpty-dumpty image by shutting its stores to become a pure Internet retailer of computer products,

Egghead.com's

(EGGS)

stock price has zoomed 57%. Still, even after yesterday's mad rush back into the Internet by confused tech investors, the old Egghead Software is quickly picking up a reputation in some investment circles as the poor man's Internet play.

The numbers tell the story: Egghead trades at a mere two times its book value of around $4. That compares with

Onsale

(ONSL)

, another computer equipment retailer, which trades at 30 times its book of a buck. Other hot Net stock book multiples:

Amazon.com

(AMZN) - Get Report

is at 53 times;

Yahoo!

(YHOO)

, 34 times;

AOL

(AOL)

, 42 times; and

Excite

(XCIT)

, 29 times.

What's more, Egghead has a market cap of $262 million versus $614 million for Onsale. But Onsale has only 66 cents per share in cash versus Egghead's $2.50 per share. Furthermore, thanks to a flurry of marketing alliances with the likes of Yahoo! and

C/Net

(CNWK)

, Egghead rang up an average of $2 million in Internet sales per week in February, double its January rate. (A weekly rate of $2 million would put it just about on par with Onsale's third-quarter revenues.)

If Egghead received the same price-to-book as Onsale, it would trade at 120, not 11 3/8, which is where it closed yesterday. (Onsale closed at 33.) Leads you to wonder whether Egghead is too cheap and everybody else is simply too expensive -- or perhaps a little of both.

Whichever it is, expect to hear more from Egghead in coming days. The company, which has yet to get any major analyst recommendations, is heading to New York and Boston for a week of dog-and-pony shows.

Its biggest challenge will be to convince Wall Street that despite having lost money in recent years, it isn't damaged goods and should be treated like the rest of the Internet pack. Unfortunately, when it comes to the investment community, "To have lost profit is a sin," says quotemeister David Simons, managing director of

Digital Video Investments

in New York. "To never have had it is reason for faith."

Short Positions

If Compaq (CPQ) sneezes, will CDW (CDWC) catch cold?

Yesterday the catalog retailer of PC products got the sniffles when it fell 7% to 59 5/16. According to the company's skeptics, that could be just the start of a much worse illness. "When you're a mail order company, and your entire business is PCs, and the PC business slows, you're dead," says Marc Cohodes of

Rocker Partners

in Larkspur, Calif., a longtime short-seller of CDW's stock (and, in the name of full disclosure, an occasional contributor to this column).

Like other resellers, CDW's profits get a boost by rebates from PC makers if it meets sales quotas. "If you don't sell," Cohodes says, "you get zero."

Just last week

CompUSA

(CPU)

, the country's biggest PC retailer, disclosed that it was getting hurt by a PC sales slowdown. "If it's affecting them, imagine what it's doing to the mail order guys," Cohodes says. "And with prices getting lower and lower, what's the catalog's edge?"

Interesting point, especially when the typical PC catalog customer is rapidly migrating to the Internet to shop. (See the Egghead story above.)

CDW officials didn't return my call. (Quite a few companies haven't returned my calls since I joined

TSC

. I suppose they've never heard of

TheStreet.com

. If only they knew who our readers were.)

Now, for the other side of the story:

An item here yesterday on

3D Labs

(TDDDF)

suggested the chip maker's profits could be about to tumble after

Diamond Multimedia

(DIMD)

, one of its biggest customers, decided to buy chips directly from

Texas Instruments

(TXN) - Get Report

, which was making the chips for 3D Labs. The switch occurred after 3D Labs missed its December quarter earnings because of production problems at TI. Instead of getting all of the revenue directly, 3D Labs would instead get a royalty from TI, resulting in less revenue and, presumably, smaller profits.

Not so, insists

CIBC Oppenheimer

analyst Lenny Brecken, whose firm led the underwriting of 3D Labs' public offering last year. In reality, he says the change works in 3D Labs' favor, because manufacturing costs would've resulted in the company making little, if any, money on each chip it made. With the royalty, it has no manufacturing costs, so the royalty will drop directly to the bottom line.

So, while revenue will fall, If 3D Labs didn't get a single new customer Brecken says its profits would remain stable. That doesn't take into account several new customers 3D Labs has recently signed. As it stands, he says 3D Labs trades below every other graphics chip company, including a few that don't have proven design wins.

FYI (as you might guess): 3D Labs skeptics don't buy his argument.

About the boss (HIM):

Couldn't agree more with Jimbo yesterday when he wrote that as far as his kids are concerned, a PC's speed is irrelevant. "As my kids know better than anybody, there isn't anything out there that makes high-intensity CD-ROMs look that much better." Indeed. I just bough a new machine with a Pentium 266, 24-times CD-ROM drive and a 56K modem. It's quite the performer compared with my old Mac and its 486-equivalent, 2-times CD-ROM player and 28.8K modem. "Wait'll you see this thing run your games," I told my kids. So, on Sunday I installed (or tried to install) my 8-year-old's

Where in the World is Carmen Sandiego Jr.

It wouldn't work. That little "error" box said I needed to reset the video display to an archaic setting.

Turns out the machine was more advanced than the game. I reset the display. My son played the game. Was it any faster and snazzier on the new machine versus the old? My son, with zippo conviction: "I guess so."

On the other hand, Cramer, while maybe a genius on the psychology of the PC market, could very well be losing his touch on the psychology of this stock market. Remember what he wrote yesterday about how he and his beleaguered partner,

Jeff Berkowitz

, disagreed Friday, in the wake of the Compaq bombshell, over whether Cramer should have bought

Dell

(DELL) - Get Report

after the market closed? "If I am right,'' he wrote, "Dell rallies from the opening," on the belief that mutual funds would be up to their old tricks of buying the dip. "If Jeff is right," he added, "no one is safe."

From the opening bell, Dell fell.

Quick, everybody, duck and cover! (Chalk up another one for the Berk-man.)

Finally:

After all the fuss about Compaq warning of a lousy quarter, in part because of its stuffed channel, its stock shed just a couple of points yesterday. Recalling how Compaq's brass had been insisting in recent weeks that its channel was hunky-dory, one shrewd trader I've known for years lamented, "In the old days, it would've been cut in half for not telling the truth."

Herb Greenberg writes daily for TheStreet.com. In keeping with the editorial policy of TSC, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnership. He welcomes your feedback at herb@thestreet.com. Herb Greenberg also writes the monthly "Against the Grain" column for Fortune.