EMachines’ IPO Takes 8% Dip in the Market
Investors gave a chilly reception to bargain computer maker EMachines Inc.’s initial sale of stock, sending the Irvine company’s shares down 8% on the first day of trading.
Analysts attributed the weak debut to doubts that the company can ever become profitable in the increasingly competitive low-end personal computer market.
EMachines has racked up impressive sales, rising from nowhere to become the industry’s fourth-largest consumer personal-computer vendor in two years. But thanks to its slim profit margins and hefty marketing and acquisition expenses, the company also recorded $84.5 million in losses last year.
“From the standpoint of the investor, they don’t have a story that’s compelling,” said Rob Enderle, who covers desktop personal computers for GIGA Information Group, a market research firm. “It’s hard to show an upside and easy to create scenarios with a substantial downside.”
The offering of 20 million shares raised $180 million. The stock, priced on Thursday at $9, dropped 75 cents Friday to close at $8.25, as almost 17 million shares changed hands on the Nasdaq market.
EMachines executives did not comment on the sale or the market’s response.
Founded in late 1998, EMachines generated immediate volume and buzz by introducing the first branded personal computers priced at less than $400. It has sold more than 2 million computers, supplying many of the low-cost models packaged with offers for long-term Internet service by providers like America Online.
Its sales topped $815 million last year, with volume jumping 65% from the third to the fourth quarter, compared to an industrywide average increase of 6.6%, said Anne Bui, an analyst with International Data Corp.
Still, EMachines’ profit margins on computer sales remain a measly 4%, far lower than other leading computer makers.
EMachines is attempting to move beyond computer sales, using its vast customer base and specialized software to generate revenue from online advertising. It also provides its own Internet service, e-machines.net. By buying Free-PC Inc. in November, the company acquired proprietary software that gives users one-touch access to advertiser-sponsored Web sites.
Even if EMachines’ move into the higher-profit Internet service arena succeeds, it faces other hurdles.
Apple Computer Co. has sued the company, claiming it copied the iMac design. Compaq Computer Corp. and Packard Bell Inc. also have filed lawsuits accusing EMachines of patent infringement.
EMachines has denied all the claims, but the litigation costs are mounting, Enderle said.
The company’s major stockholders include America Online, which owns a 6.4% stake now worth more than $76 million, and Bill Gross, chief executive of Los Angeles incubator Idealab, who holds 12.4% of the company, valued at about $148 million.
EMachines Chief Executive Stephen Dukker’s 5.7% stake is worth $68 million.
