| BUSINESSWEEK ONLINE : MARCH 8, 1999 ISSUE | ||||||||
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| COVER STORY
Can New Facets Make Diamond's Stock Shine Again? For ailing modem and graphics-card maker Diamond Multimedia Systems (DIMD), the successful launch of two hot new-product lines late last year was just what the doctor ordered. Sales are soaring for its three-month-old Rio, a portable electronic device about the size of a pack of cards that plays CD-quality music downloaded from the Internet. Diamond sold 250,000 units of the trendy $199 gizmo in its first three months and expects to sell 750,000 for all of 1999. That could add $30 million to its revenues (see BW Online 12/3/98 "Diamond Rio: The Little Music Player That Could". This is just the first of many digital audio products the company plans to bring out. "You're going to have a whole family of products," says Brian Alger, a senior research analyst at Preferred Capital Markets. "This is not a one-trick pony." Last November, Diamond also began shipping a product called HomeFree, which allows easy PC networking in the home. The market for home networking equipment is expected to grow steadily over the next few years, along with the number of multiple-PC households. On Jan. 5, in fact, Diamond announced that Compaq Computer (CPQ) will use HomeFree in its line of home-network-ready and custom-built Presario PCs. That legitimizes Diamond's product, says Naohisa Murakami, an analyst with CIBC Oppenheimer. POINTS OF LIGHT. "This market is going to be slower growing than the Rio's, but it is potentially much, much bigger," Alger says of the HomeFree line. Eventually, he envisions Diamond providing a router for homes that distributes Internet access to a range of digital devices, including PCs, set-top boxes, TV sets, and stereos. That technology might even make it possible to turn on your heating system or your lights remotely via the Net. The Rio and HomeFree have provided two sorely needed points of light for Diamond Multimedia's future. The company has lost more than $65 million from operations in each of the past two years as its core modem and multimedia products have turned into low-price commodities. Its quarterly earnings (or lack thereof) have disappointed Wall Street repeatedly. Its stock, which climbed above $40 in 1995 when it was one of the hottest tech IPOs that year, has spent the past three years trading in a range between $8 and $15 a share. It fell as low as $2 7/8 on Oct. 9, 1998, the day after the company reported a third-quarter loss of $22 million, of 63 cents a share. Diamond announced a major restructuring in mid-November, and the stock has climbed back to close on Feb. 25 at 7 5/8 on the strength of the company's new products and on hopes for a successful reorganization. A few analysts are now recommending Diamond's stock as a turnaround play. Jason Ader of H.C. Wainwright & Co. initiated coverage with a strong buy at the beginning of 1999 when the stock was about $6. "There was incredible value in the stock that was not being realized yet," says Ader, who has a price target of $15. Preferred Capital's Alger started coverage in September, 1998, and has a price target of $14 based on his estimate that the company will earn 54 cents a share in 1999. Alger believes that the main catalyst for the stock is the restructuring of Diamond's core businesses. It has exited lower-margin markets and focused its graphic-card business on two main products. Diamond has also upgraded its computer systems and added inventory controls so that it can avoid oversupplying the market. "That allows me as an analyst to sleep better at night," says Alger. In 1998, restructuring charges and repositioning cost the company nearly $25 million in earnings. But "the core business is now in good shape," Alger says. "CREDIBILITY ISSUE." Most of Wall Street isn't as confident. "There is a credibility issue with the company," says Ader, reflecting its failure to meet analysts' expectations for several quarters over the past two years. "People have long memories for that," he adds. Institutions currently own only 24% of Diamond's common stock. The underlying concern for investors is competition. Diamond was first to market with the Rio and HomeFree, but Samsung has announced a Rio-type product, and Sony probably isn't far behind. Moreover, in the home-networking market, "3Com could just come in and dominate," says Murakami. "The challenge for Diamond Multimedia is to stay one step ahead," says Ader." He thinks Diamond's strong brand name with the PC and gaming community will give it an edge over consumer electronics makers who aren't accustomed to serving that customer base. Just as 3Com (COMS) has been able to hold its lead with the Palm computer line despite Microsoft's (MSFT) entrance into handheld computers, he thinks Diamond can keep Rio out front. Long-term, the company's two-tiered strategy makes sense for investors. Diamond plans to continue to improve operations in its existing commodity businesses while also launching more higher-margin proprietary products to take advantage of the growth in digital media. Its current product lineup allows it to serve the same home-PC customer with a high-speed Internet connection (DSL modems), graphics and sound cards, equipment to network all the PCs in the home (HomeFree), a Web site for downloading music (www. RioPort.com), and a Rio to make that music portable. It also plans to add more products to that mix. As a turnaround play, Diamond won't produce results overnight. The company still must prove that its core modem and graphic-card businesses can be profitable and that it can hold onto its lead with the Rio and HomeFree. But at least the company now is prepared to play in the post-PC Age. By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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