Bidding Into The Stratosphere
(11/25/98, 1:59 p.m. ET)
By Tom Taulli, TechWeb
Before the year ends, we should see several red-hot
IPOs hit the ever-exciting Nasdaq marketplace. One that
will likely come to market is uBid.
The company has already filed for an offering, which will
be underwritten by Merrill Lynch. The IPO is expected
to debut next week, with the proposed ticker symbol of
UBID. The offering is relatively small: 1.58 million
shares with a price range of $13 to $14. There are 8.9
million shares outstanding. The small number of shares
should help boost the stock, since, as Adam Smith
theorized, high demand and low supply lead to high
prices. It's as simple as that.
But don't IPOs only go to institutional investors and
wealthy individuals? In many cases, that is true. But
online investment bank Wit Capital is offering its
members uBid shares on a first come, first serve basis.
Investing in Internet-company IPOs is not guaranteed.
Look at the latest huge IPOs: theglobe.com and
EarthWeb. Both had spectacular debuts, but since then,
have undergone significant erosion in their stock prices.
Who is uBid?
UBid is a wholly owned subsidiary of Creative
Computers (Nasdaq: MALL), a catalog retailer of
computer products. Creative Computers will initially sell
about 20 percent of uBid to the public. Next year,
Creative Computers says it plans to divest the remaining
80 percent of uBid through a tax-free distribution to its
existing shareholders.
As the name implies, uBid is an online auction company.
It offers primarily close-out or refurbished computer
products. The company started its auctions in December
1997. Since then, it has auctioned more than 138,000
products and registered more than 120,000 users. Repeat
customers accounted for about 68 percent of all orders in
the past three months.
The uBid site auctions merchandise from more than 100
vendors, including Apple, Dell, Gateway, HP, JVC,
Panasonic, NEC, and Sony.
The Online Auction Market
According to a study by credit card company Visa, about
46 percent of all online users will make holiday purchases
(about 48 percent will be in their pajamas). Another
study, from New York-based Jupiter Communications,
shows retail consumer purchases of goods and services
over the Net will increase from $2.6 billion in 1997 to
$37.5 billion in 2002.
The biggest online shopping category is computers and
consumer electronics, a market projected to grow from
$836 million in 1997 to $10.5 billion by 2002.
uBid's Financials
The company showed a net loss of $3 million for the nine
months ended September 1998. For that same period,
sales were $24.1 million. But there is significant growth:
In January, uBid had only $157,000 in revenue; by
September, the company was generating $5.8 million in
sales per month. In other words, the company is showing
incredible momentum in sales growth.
Gross profits, which is revenue minus the cost of
merchandise, shipping, and net returns, were $1.9 million,
or 8 percent gross margins, for the nine months. These
are fairly slim, but as sales grow and costs stabilize, the
margins should improve. Sales and marketing expenses
during that time totaled $1.4 million, while R&D,
including payroll for systems personnel,
telecommunications charges and Web-hosting charges,
added up to $694,000.
The company's general and administrative expenses --
for credit card processing, warehousing, distribution,
customer service, accounting, and executive
compensation -- totaled $2.7 million.
Is uBid The Next eBay?
UBid faces intense competition from competitors such as
Onsale, eBay, Yahoo Auctions, First Auction (owned by
the Home Shopping Network), Surplus Auction (owned
by Egghead.com), WebAuction (owned by
MicroWarehouse), and Insight Auctions.
But the fierce competition hasn't been much of a concern
for investors in the hot IPO market. The latest online
auction site to go public was eBay, and its performance
has been amazing. The stock is up more than 700
percent since its September IPO. Many feel uBid will be
the next eBay.
But there are major differences between eBay and uBid.
First, eBay is a person-to-person auction site. That is,
suppose you have something to sell -- such as artwork.
For a fee, you can list this item on eBay and let other
users bid on it. UBid is a business-to-person auction.
Instead of a person selling items, uBid obtains
merchandise from manufacturers.
This is a big difference. The reason is inventory risk.
Here's why: Since uBid purchases products from
manufacturers, it must store these products in its
warehouse, which costs lots of money. Because the
inventory is mostly composed of computer products,
there is great risk of obsolescence, which can put
pressure on margins.
There is another big difference: scale. EBay, with 1.2
million users, is much larger than uBid. Oh, another big
difference: EBay is profitable. Last quarter, the company
racked up $2 million in profits.
But such differences don't necessarily mean much when
it comes to Internet IPOs. Investors are likely to bid this
stock into the stratosphere. |
