Parallel Lives? From: interactive.wsj.com
May 20, 1999
Investors Stew as Onsale Fails To Pull Out of Its Long Slump
By CARRIE LEE, THE WALL STREET JOURNAL INTERACTIVE EDITION
Onsale used to be an electronic-commerce darling in the stock market --and among online investors. Now shareholders are scratching their heads, wondering why the stock itself seems to be on sale.
Shares of the online computer retailer have lost nearly 80% of their value since November, when they touched 108 amid euphoria about online holiday shopping. And Wall Street analysts are gloomy about its prospects.
Onsale's highly-touted plans to drive traffic to its site by guaranteeing that all products will be sold at cost isn't bringing the Menlo Park, Calif., company any closer to profitability and don't even guarantee that its prices will be the lowest available on the Web, analysts say.
Meanwhile, two executives of the company -- including Chief Executive
Jerrold S. Kaplan -- pared their holdings in the company last month when its stock was trading near its recent low, just above 20. On Wednesday, Onsale shares rose 5/16 to 22 13/16 on the Nasdaq Stock Market.
Some message-board participants, unaccustomed to weakness in e-commerce stocks, are looking for a scapegoat. "Why are these analysts so obviously biased against ONSL?" wrote one on a Silicon
Investor (www.techstocks.com) board, referring to Onsale by its stock symbol.
Wall Street analysts, in lockstep,have cut their investment ratings on
the stock. Most now rate it "neutral" or "hold," which many people on Wall Street actually interpret as a signal to sell. The analysts are concerned about hot competition Onsale faces and fearful the company hasn't come up with a plan that will set it apart from the pack of online retailers.
"It's just not a sustainable [business] model," says Steven Frankel, an analyst with Adams, Harkness & Hill in Boston. "At this point its model is broken."
Onsale made a big splash in mid-January with its plan to sell goods at the same price it pays for them. The company, which started out as an online auction concern, planned to make money from advertising on its Web pages and hoped to cover some of its expenses with a transaction fee on each purchase, equal to an average of about 2.6% of the total cost. In April it backed away from the fee and decided to waive shipping costs.
"Our objective right now is to build brand awareness and increase traffic, in order to do that you have to make a pretty huge marketing
investment, that's what we're focused on doing," says Brian Fawkes, a spokesman for Onsale. "So far it's been a successful program for us."
But the pace of user growth has slipped in the four months since the
at-cost program began. Mr. Fawkes says registered users are up 17%
since the start of the year. Registered users increased 18% during the final three months of 1998 alone. He says the value of the average order rose to $239 in the first quarter from $190 in the fourth quarter of 1998.
Analysts say the at-cost program may not be enough to lure customers to the Onsale site, partly because some online retailers are trying to build business by selling goods below cost.
Indeed, a search this week for an Epson Stylus 740 printer on Shopper.com (www.shopper.com), a comparison-shopping service run by
CNET, ranked Onsale's price 14th best of 53 offerings. Onsale offered a price of $223.96, while the lowest price was $159.00. Eight retailers priced the printer under $200, although seven of them charge for shipping, and Onsale doesn't.
"We have literally hundreds of thousands of products," says Mr. Fawkes. "We look at it collectively and recognize we won't always have the lowest price on each product."
Dan Ries, an analyst at Kaufman Brothers in New York, says intense price competition has set up the online computer-retailing industry for losses. "If three [sites] sell the same Compaq computer, the customer will go for the cheapest one," Mr. Ries says. "No one will make any money."
Onsale hasn't earned a profit since it went public two years ago, and isn't likely to do so in the foreseeable future. Analysts expect the company to post a loss of $1.93 a share this year, and $1.21 a share in 2000. For the first quarter Onsale reported a loss of 28 cents a share, compared with a loss of 22 cents a share a year earlier. It posted first-quarter revenue of $67.8 million, up 69% from a year earlier.
Several weeks after the first-quarter earnings report, two executives of the company sold a total of 300,000 shares of Onsale stock, according to filings that they made with the U.S. Securities and Exchange Commission. Mr. Kaplan, the chief executive and president, sold 100,000 shares at $23.17 a share on April 20, while Alan Fisher, vice president of development and operations, sold 200,000 shares at prices ranging from $22.97 to $23.94 a share on April 20 and April 21. As of April 30, Mr.Kaplan held 5,049,000 shares directly and 28,700 shares indirectly, and Mr. Fisher held 3,318,200 shares directly.
Mr. Fawkes says the two individuals regularly sell part of their holdings. Mr. Kaplan wasn't available for comment.
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