Email : info@otcjournal.com
URL : http://www.otcjournal.com
To
OTC Journal Members:
Today's profile is the first in a
series of five that we will be bringing you over the next several months.
Generally we like to release one new profile per month. Due to recent unfavorable
market conditions, we have not released a profile since February 18th.
The recent market turmoil has left many investors bleeding, but has also
created some low risk entry levels for small stocks. Therefore, we will
try to bring you one new idea every two to three weeks as long as these
low prices prevail.
The market should experience some
relief next week after the highly anticipated Fed rate hike. The economy
might not be quite as overheated as investors have been expecting. PPI
was lower than expected today, and retail sales were the same yesterday.
This is why we decided to release this new profile now. If there is renewed
interest in stocks, we want you in ahead of the crowd.
We believe that the worst of the
bear market will be over by June. The Fed will probably raise interest
rates several more times, with the last rate increase coming in August.
There has never been an interest rate increase in the 4th Quarter of a
Presidential Election Year. Inflation fears behind us will set the stage
for the next Bull Market. If you have a six month time horizon on investments,
you should be looking for opportunities in small stocks today. We believe
you will be able to lock in substantial returns from today's levels before
the end of the year.
The last comparable sell-off in small
and micro cap stocks began in August 1999, and continued throughout early
October of 99. During August and September both prices and volume were
very low, which is exactly where we are today. From November to early March,
we saw one of the greatest bull runs for small stocks we have ever seen.
We believe history will repeat itself in the coming months.
Here is a quick review of our profile
performance from October 1st through the beginning of March when we brought
you two triples and an 8 bagger.
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NetSol International (NASDAQ: NTWK).
NetSol
was $5.25 on October 1st, and now is trading at $38 for a nearly 8 fold
return in 7 months.
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Blue Zone (OTC BB: BLZNE)
came out on November 12th at $5, and traded as high as $15.375 on March
8th.
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Pawnbroker.com (OTC BB: PBRR) was
released on December 10th at $7, and traded to a high of $17.875 on March
15th.
With the exception of NetSol,
the recent market drop eradicated many of these great gains, but that has
been true for nearly all stocks. For a complete up-to-date track record
on every company we have profiled since the beginning of 1999, click
here or go to the profile tracking button on our home page. We
have never profiled a company, which did not trade above the profiled price.
The Internet Sector has been one
of the hardest hit in this bear market. Many stocks are trading at 1/4
to 1/3 of their previous highs. We are taking the position that the Internet
sector is a great place to look for lower risk entry levels right now.
The use of the Internet is continuing to explode and recent surveys
estimate that only 1 in 35 individuals worldwide is currently using the
Internet. The estimated number of users grew from 26 million in December
of 1995 to 163 million in April of 1999. Furthermore, an IDC study
estimated that there will be 502 million users on the World Wide Web
by 2003, triple of the current estimated number today. The Internet
is continuing to be the engine for one of the fastest and most prolific
growth models in modern history.
Common sense tells us Internet related
companies will do extremely well over the immediate coming years. Look
back at the growth of your own personal use of the Internet two years ago
compared to today. If you're anything like us, your use of the Internet
has grown dramatically.
This growth should not only continue,
but accelerate dramatically. Our recent survey revealed to us that 68%
of our members are still connecting to the Internet via dial-up modem.
Once these users have broadband internet access, it will revolutionize
their experience to a whole new level. High speed wireless connectivity
is coming quickly, and people are now beginning to access the Internet
for information and e-mail via digital cell phones and hand held Palm Pilots.
As we speak, "Thin Client" technology
is being embraced with open arms. The technology is currently being provided
and developed by many Application Service Providers (ASPs), which can serve
up your personal operating system upon demand from any terminal throughout
the world connected to the Internet. You will now have the ability to sit
at any terminal with Internet access, log in with your password, and start
working from your own personal desktop. You won't need a PC with software.
You will be able to access any software over the network along with your
personal files and use or modify them at will.
Large companies have already staked
out their claim in the Internet universe. Yahoo! (NASDAQ: YHOO)
was the early success story and remains the largest Internet community
today. The media giants are now muscling their way into the Internet as
they recognize they can leverage their brand names to create traffic. The
AOL/Time
Warner merger is a great combination. AOL has the audience.
Time Warner has both the content and broad band technology via cable
modem. They will be a dominant force in the future. Go.com
aligned itself with ABC and Disney to create their web community,
and CBS has also staked its claim.
Now that the large companies are
positioned for their piece of the massive Internet pie, there is substantial
room for niche companies to provide Internet related products
and services. If history repeats itself, the Internet revolution
should follow the same pattern that evolved in the telecommunications revolution
in the 80's and 90's. Niche companies successful in launching their businesses
will create substantial profits for early stage investors, thus leading
to prime takeover or merger candidates for the larger Internet conglomerates.
Therefore, our first profile after
the recent crash is a niche player in the Internet e-commerce space,
which
is entering a huge emerging market with very little competition. They are
described as a B2C business model, meaning they will be selling
directly to consumers over the Internet. They are well financed and
should enjoy significant growth over coming quarters. This Company will
build their infrastructure out over the next two quarters, launch a major
advertising campaign, and look to have a prolific 2000 holiday season.
The stock has pulled back to 50% of its recent highs, and the time to look
at this company is now.
 |
PhotoChannel
Networks, Inc. |
|
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Photo Community Web Site: http://www.photochannel.com/
-
Stock Listing: Dual Listed on OTC
BB: PHCHF and Montreal Canadian Exchange: PNI
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Estimated Shares Issued and Outstanding:
24 million
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Estimated Public Float: 12 million
-
Closing Price and Volume: $1.57 x
$1.6875 on 159,700 (US Quote)/ $2.41 x $2.49 CND on 809,100 shares (Canandian
Quote)
-
Market Capitalization: $36
Million
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52 High and Low: $2.625/$.41 (US)
-
Click
Here for a current stock chart (This page has both the US and Canadian
Quote)
To understand the upside potential in
PhotoChannel
Networks, Inc., you first have to look at the market in which they
intend to establish their business. 1% market penetration for this Company
probably means a 10 fold increase in the stock, and there is no dominant
competition standing in their way.
$15 Billion was spent
on Photography in the U.S. in 1999. It was spent in the following
manner:
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$2.55 Billion (17%) for Film
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$1.5 Billion (10%) for Camera and
Related Hardware
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$6.3 Billion (42%) for Film Developing
Film Developing is a huge and
growing industry. Worldwide, the photography industry is estimated
to
be $100 Billion by 2002, and industry experts forecast 20% ($20 billion)
will be in the Digital Category.
Although there are a number of emerging
competitors getting into this market, the demographics for growth are compelling.
Digital camera usage growth is expected to escalate from 8.3 million units
in 1999 to 18.7 million units by 2002 worldwide. Currently there are approximately
400 million photographs uploaded onto the Internet and stored in photo
processing servers. It is estimated that this number will grow
to 5.5 billion images by 2002.
The Main Stream media is starting
to catch on to this growing phenomenon. The March 20th Edition of
Fortune Magazine contained a feature article entitled "The Internet's
New Revolution In Photography". PhotoChannel.com is mentioned
in the article as one of the new companies entering this business.
Click
Here if you wish to read the article in Fortune's archives.
 |
PhotoChannel's
Service |
 |
Here's how it works.
-
Step 1: Take pictures with your digital
camera.
-
Step 2: Put the floppy disk with the
images in your computer (or hook your camera up to your computer).
-
Step 3: E-Mail the files to your account
at www.photochannel.com.
-
Step 4: Pay a fee of $7.99 through your
on-line account with Photochannel.
-
Step 5: Receive your 24 high quality
prints in the mail the next day.
This service has all of the benefits
the Internet has to offer. It is very easy and inexpensive. There is immediate
gratification as your prints arrive as early as the next day.
More importantly, management
assures us that gross margins will run 35% to 40% because of their low
overhead cost structure.
Add-on sales are also an important
part of the picture. Once transferred, customers have the ability to archive
the pictures in their own personal on-line photo album. Slide shows similar
to a Power Point presentations can be created. Via permitted access, friends
and relatives can access each other's own personal online photo albums
and order copies of their own prints.
|
PhotoChannel's
Competitive Advantage |
|
Processing prints from digital pictures
is quite different from processing prints from regular film. Different
processing equipment is required. Software is also a key component in developing
digital pictures.
Most of the many new entrants into
this market are merely marketing companies without the necessary technology
to develop in-house. They outsource their developing services. However,
PhotoChannel
has the competitive advantage of owning its own state-of-the-art processing
machines. They have purchased the Fuji Frontier Technology, which
is considered to be the best technology available today for processing
digital pictures. They will also be using Fuji paper, which they will be
purchasing at a substantial volume discount.
They plan on having several processing
points nationwide. The locations are being determined now, and are being
chosen based on geographic proximity to regional branches of the U.S. Post
Offices where delivery rates and efficiency will be most cost effective.
The U.S. corporate headquarters is
now open in Stanford, CT, and expansion to other key cities is planned
for this summer. On-line developing services are supposed to be offered
for the first time by the summer with other locations open and functioning
by the critical holiday season.
|
Strategic
Alliance |
|
A second key competitive advantage
is PhotoChannel's strategic relationship with ShopNow.com.
On November 16, 1999, PhotoChannel announced that ShopNow.com
had
made an equity investment in the company of $250,000, and would become
their E-business solution partner.
This gives PhotoChannel
the ability to market to the six million shoppers
that are in the ShopNow.com database.
We also believe PhotoChannel's
strategy of making ShopNow.com an equity partner in the company
is extremely powerful. ShopNow.com stands to make a substantial
profit from their ownership in the company in addition to fees from e-commerce
transactions. This gives them the marketing horsepower they need
right out of the gates.
|
Well
Financed |
|
The final condition required to meet
the terms for financing was announced after the market closed today. Today's
announcement concerning a licensing agreement was the last piece of the
puzzle. Funds for the financing have been in an escrow account awaiting
certain conditions to be met. PhotoChannel has now met those conditions.
$15 million (CND) in
equity financing will now be released out of the escrow account.
$5 million will be released on Monday and the rest will come in
traunches. This will give the company the equity capital required to purchase
additional Mini labs from Fuji and roll out its service on a nationwide
basis.
On May 4th the company announced
that it would be raising an additional $25 million (CDN)
through the formation of a Limited Partnership, which will be used to continue
the development of the service. The Limited Partners will enjoy the
benefits of tax losses associated with the upfront costs.
This capital will allow the company
to accelerate its roll out and be in position to capture market share in
the all important 2000 holiday season. The company's
stated objective is to turn profitable by the end of the year.
|
Management |
|
The management is outstanding. Geoffrey
G. Briant serves a President and CEO. He has a background in corporate
tax where he specialized in establishing and negotiating agreements with
manufacturers of digital imaging devices. Just prior to accepting the role
as CEO of PhotoChannel, Mr. Bryant as a director of Alliance Capital Management
Canada, Inc. The firm's parent company, Alliance Capital Management L.P.
of New York, is an international investment management firm with over
$250 billion in assets.
He has surrounded himself with a
quality management team with experience in every aspect of this business.
|
Conclusion |
|
On February 24 of this year a research
report on the Photography and Imaging industry was released by Jonathan
Rosenzweig, an analyst at SalomonSmithBarney. It is a 99 page
report covering every aspect of the business.
The report is very optimistic about
the growth of e-business in this industry segment. The report anticipates
that 5.5 billion digital images will be uploaded by 2002, up from today's
level of 400 million.
The report also anticipates photographers
will still want high quality prints at reasonable prices. Competition from
in-home printers are not viewed as threatening due to the associated costs
and inconvenience as opposed to a $7.99 solution delivered right to your
front door.
There are also 21 different small
companies entering this arena which is described as Portals/Photofinishers/Communities.
In the report, Mr. Rosenzweig also anticipates a number of these smaller
companies will file for initial public offerings sometime this year.
Bear in mind, the report was issued
on February 24th. Since that time, the IPO market has completely
vaporized. Therein lies your advantage as an individual investor.
To our knowledge, excluding the major
diversified photography companies like Kodak, there is only one other public
company specializing in the e-photography market (PhotoLoft- OTC PS:
LOFT), which trades in the obscurity of the OTC Pink Sheets.
In our
opinion, with the IPO market in the toilet, PhotoChannel.com (OTC BB: PHCHF)
is the only stock for investors who want to own shares of a publicly traded
company specializing in this particular market segment.
When Wall Street recovers and starts
to focus on this market niche as a growth area, PhotoChannel.com (OTC
BB: PHCHF) will probably be the only pure play in this arena.
The stock is dual listed on the OTC
Bulletin Board under the symbol PHCHF, and the Montreal Stock Exchange
where it currently trades under the symbol PNI. There is so
much anticipation over the potential success of the business the stock
often trades over 1/2 million shares per day on the Montreal exchange.
It is not as widely followed in the U.S. market yet, but the prices on
each market are adjusted to reflect movement in the other.
If you still believe in the future
growth of the Internet, and like the idea of investing in a unique niche
company, PhotoChannel.com is for you. A six month time horizon
is advisable due to market conditions but next week could turn out to be
a great week to own a small stock trading at a 40% discount to its high
set back on March 29th of this year.
One note of caution- as a general
rule it is advisable to always use a limit order when trading in Bulletin
Board stocks. Traders will take advantage of investors that use market
orders. If there is a sudden surge in the price of a stock, it will
often retreat temporarily before moving on to new highs. |
