Homestore made millionaires out of insiders and put other investors through the wringer. This past week, with its precipitous drop to $.14 per share before rebounding to over $.40 cents, Homestore's valuation shows that investors don't have much confidence in the dot-com. Could HOMS' prospects improve?

First, let's get some perspective. In the heady dot-com days before March 2000, most companies were overvalued by the marketplace. The "irrational exuberance" coined by Fed chairman Alan Greenspan, a euphemism for greed, changed sound investing and business ethics principles into a "new economy." Before Tech Wreck, companies traded at impossible multiples that were bound to lead to implosions. While it's smug to say that in hindsight, Homestore's former upper management certainly took advantage of the timing, relaxed accounting practices , and insider trading to benefit at shareholders' expense.

Thanks to an inevitable accounting scandal, for which the company had to restate revenue , those former managers have been ousted, and sued in a class action, along with Homestore. That's the first and foremost threat to Homestore's future.

Adding to Homestore's accounting woes is a dispute with its main traffic partner, AOL, with which it has an agreement to exchange advertising revenues for HOMS stock and cash. HOMS put into reserve over $90 million in cash to cover the shortfall should the stock fall below about $65. At $.40 a share, it certainly has.

Third in a trio of troubles is an SEC investigation, which may involve HOMS relationship with AOL, as both companies have been accused of accounting for certain transactions improperly.

These three problems might seem insurmountable, but under the rubble, a working company remains - one that is essentially composed of parts that would be able to carry on whether Homestore were operating them or not.

Here are 10 reasons why Homestore could beat the odds and rise again from the ashes.

1. The class-action suit should be settled - A long list of burned investors are suing HOMS and its former management for manipulating the stock prices.

   What do the plaintiffs have to gain if the case goes to court and a judgment in the billions is levied against HOMS? HOMS would immediately file bankruptcy and lead plaintiff California State Teachers Retirement System gets in a long line with everyone else. With a little luck, CalSTRS gets to put someone on HOMS reorganization board. For what? CalSTRS still owns over 150,000 shares, worth about $87,000 today. And HOMS already has new management that is feverishly working to retain customers and grow sales. The upside potential that this management team can do more for the shareholders than a bankruptcy proceeding is obvious.

   It's a good bet that this class action suit will settle out of court before going to trial, because CalSTRS and other plaintiffs will see the wisdom of letting HOMS new management work its magic. A long-term payout by HOMS so that it can hang onto its operating cash could work if sales renewals and growth continue, which they are more likely to if customers believe the company will survive. And a settlement would do a lot more to convince them than a bankruptcy proceeding.

2. AOL dispute will settle - HOMS issued AOL $20.0 million in cash and 3.9 million shares of common stock in exchange for access to AOL's 24 million-member distribution channel, guaranteeing that if HOMS stock price drops below $65 a share, that HOMS would make up the difference on certain percentages of AOL's shares. HOMS put $90 million in reserve to cover any potential shortfall.

   A dispute has arisen on whether or not AOL lived up to its side of their agreement. In other words, both sides want access to that money now.

   According to Steve Ozonian, AOL and HOMS are still in arbitration. "It will get solved," he told Realty Times, "to the benefit of the HOMS Realtor."

   But even if arbitration fails, the worst-case scenario has already been accounted for and that is that HOMS doesn't get to keep the money. HOMS has already put what it owes AOL in reserve, and has accounted for that money all along. The upside potential is that AOL allows HOMS to unrestrict all or part of the money.

3. The SEC won't punish HOMS - HOMS is cooperating with the SEC. The actions and results being investigated were initiated by officers no longer with the company. The "new" Homestore is unlikely to suffer any fines, nor will its personnel be sanctioned. But former officers with the company may well suffer personal sanctions by the SEC should wrongdoing on their part be proven.

   So, in the best case, if all these problems were to go away, what is left is whether or not the new Homestore is a viable company. Can it retain customers and acquire new ones? If so, it has two jobs ahead of it - cut sales costs and attract new customers. If it can do that, it is viable.

   So where does HOMS stand?

4. Burn rate is lower - Homestore Mike Long stated in a recent interview that company has reduced its burn rate from over $50 million to "less than $8 million in the second quarter. Staff has been cut from 3,500 to 2,350 and will be reduced by another 150 by the end of the year. Insiders have told Realty Times that not only has the burn been cut - so have customer acquisition costs. HOMS is also actively ramping up a call center to reach its Realtor customer base. In addition, it has sold off nonstrategic units - any unit that doesn't serve its customer base - Realtors, builders and other advertisers.

   Could costs be cut further? Certainly, but at least HOMS is headed in the right direction.

5. HOMS has cash -Long also said that Homestore is sitting on more than $100 million in cash, and that the company will be cash-flow positive by the end of the year. If HOMS is at break-even now, chances look very good that the company is positioned to grow -if they retain their current customer base, and continue to add sales.

6. HOMS has zero debt - Homestore’s most recent quarterly SEC filings show no long-term debt. Steve Ozonian and Mike Long have both been quoted publicly that Homestore carries no debt. It doesn't get any better than no debt.

7. HOMS is recognized by consumers - Consumers like the site, and go there to view listings and get services.

   Despite rivalry with HomeAdvisor over which site gets more traffic, Homestore's Realtor.com got 4.5 million unique visitors in July, the last month for which figures are available from Media Metrix. The average potential home buyer looked at 18.6 pages and spent an average of nearly 15 minutes per visit, said the NAR. That kind of trout in the stream is going to continue to attract Realtors, which may explain why Realtor.com Web site package renewals are so good.

8. Customers are renewing - Homestore has well over 100,000 active customers. That means that despite its ups and downs, agents are more loyal to Realtor.com than anyone guessed they would be. Either they like the product, or it's a pain in the neck to change Web sites. Either reason works.

9. The IDX/VOW threat didn’t materialize - IDX was supposed to be the death knell for sites like Realtor.com, but the upshot is it has little or no effect.

   While IDX and VOW (virtual office Websites) sites have been successful for many brokers, overall it has not had the wide adoption that many thought it would by now. IDX was a means for brokers to put other brokers' MLS listings (with permission) on their company Web sites, so that brokers could capture their own consumer leads. The problem is that IDX and VOWs haven't even been implemented by many MLSs, as yet, including the MLS used by a recent president of the NAR.

   The reason is that IDX and VOWs have generated disagreement among many brokers and MLS leaders. Some brokers are scuttling IDX initiatives by opting out, leaving participation as little as 35 percent in some areas. Other brokers, daunted by the expenses of paying for search engine placement, parallel servers, and steep VOW fees from their MLSs have simply decided to stick with Realtor.com. Keeping Realtor.com's traffic numbers in mind, many brokers feel that it is affordable to have it both ways - to buy Realtor.com lead generation packages and then hedge their bets with custom Web IDX and VOW sites that are found on search engines by consumers. Realtor.com even supplies IDX solutions for some brokers. Bottom line? Not an issue.

10. NAR backs Realtor.com - While NAR may have had issues with former HOMS management, HOMS is not in default of its agreement with NAR. In fact, many NAR officers consider HOMS handling of Realtor.com to be good - it helped pull RIN out of the red, made Realtor.com one of the most recognized domain names on the Internet, and has been instrumental in helping to move an entire industry online.

    The domain name, Realtor.com, is still owned by the NAR, and the site is operated by HOMS, the new management of which is very concerned about its Realtor-friendly image. Penny for penny, advertising listings online is a bargain compared to other means, and Realtor.com offers one of the first and best opportunities for listing brokers to be found online by consumers. Realtor.com pays MLSs for access to brokers listings, then advertises those listings for free. Brokers and agents pay for any lead generation opportunities that are over and above having their listings on the site.

There are a lot of "ifs" in this list, and that's why HOMS' stock is where it is. But HOMS has done the "heavy lifting" in the process of correcting its numbers, reforging its alliances, and rebalancing its employees, corporate office locations, and core assets.

And that's why it might be a very good bet going forward.

Published: September 24, 2002

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