Investors Are Taking Notice
Of On-Line Auction Firms
By AARON LUCCHETTI
Staff Reporter of THE WALL STREET JOURNAL
Going once.
Going twice.
Going higher?
The hunger for Internet stocks has spread to small on-line auction companies. Last week, Egghead.com's stock price more than doubled, rising 138%, or 12 7/16, to 21 after the Spokane, Wash., retailer reported better-than-expected revenue in its new on-line auction business for computers and electronic goods. Last year, Egghead became one of the first companies to close its brick-and-mortar shops and move completely to the World Wide Web.
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But Egghead is not alone in delving into the wild world of Internet auctions, where haggling and bidding over the computer is possible on items ranging from stereo speakers to 19th Century art. And the field is growing more crowded as investors continue to pour dollars into the Internet sector with little regard to value or earnings. Onsale, a Menlo Park, Calif., auction company that specializes in computer-equipment transactions for businesses, has seen its share price skip ahead 23.9% for the year although analysts estimate it will post a loss of 68 cents per share during 1999. Last week, Creative Computer announced it would sell to the public a 20% stake of its Internet auction unit, uBid. And eBay, which runs another popular site, is also considering an initial public offer, people close to the company say.
What's unclear, though, is whether this new Internet application will be a winner for investors. There are some experts who predict the auction sites will be the next hit, a cybergarage sale with the power to bring buyers and sellers from across the world to the same table to buy anything from jewelry to computer parts. Certainly, low overhead costs make the Internet a handy medium to gauge supply and demand for obscure items or hot fads like Beanie Babies or movie memorabilia.
"Somewhere, there's going to be success in this because it's a good application for the Internet," says Kathleen Smith, a portfolio manager at Renaissance Capital who notes that new public companies have been struggling lately unless "you have dot-com in your name."
But Ms. Smith and others say they have yet to find the right company for Internet auctions, and many analysts are still leery about how the sites will turn their popularity into profits. "The issue is how you get the repeat visits and the continuing interest," she says.
Most other on-line businesses are not as constrained by supply, argues Keith Benjamin, an analyst with BancAmerica Robertson Stephens in San Francisco. On-line booksellers like Amazon.com "can sell as many books as it can find people" to buy them, he says, and on-line travel agents like Preview Travel "can sell as many airline tickets." But auctions are limited by the supply of quality merchandise that is available at a discount price, argues Mr. Benjamin. "When we look at the supply of computer bargains, it's a limited number," he says. "I don't think it's a fantastic business."
Investors may also have trouble connecting to the right auction company. Many of the big names in the auction business are still private. And most of the big players auction similar products, creating fierce price competition and thin margins, analysts say. For example, many of the big auction houses, including Egghead's Surplus Auction, Onsale, Micro Warehouse's WebAuction, and Internet Liquidators International have a large portion of their business tied up in one industry-computer hardware. Although 60% of its auction business comes from the computers, "there are other categories where you can make higher margins," says Paul Godin, president of Internet Liquidators, a small Toronto company that has a distribution agreement with America Online. "Everyone is trying to get into computers because of its competitive nature and the rate of change in the technology." But that focus "puts downward pressure on pricing," he says. More competition could also come from other retailers adding Internet shopping sites to complement stores and mail-order operations.
The sites sell themselves as 21st century entertainment centers, combining the search for bargains over the Web with the thrill of competition. Egghead's surplus auction site promises "a fun and thrilling bidding environment." Others even offer instructions on "how to play," rather than how to bid.
Early evidence shows some Web users have taken a liking to the new sites. Egghead said last week that its on-line auction site produced $13.7 million in revenue during the second quarter, compared with $7 million in the preceding quarter. And eBay drew an estimated 1.35 million individuals to its consumer-oriented auction site in May, the fifth highest rated shopping site on the Internet, says Media Metrix Inc., a Web research firm in New York. The consumer-auction site where buyers and sellers transact directly, instead of through a third party, topped some well-known retailers' sites, including those of Barnes & Noble, Wal-Mart and Cdnow.
Some of the companies, such as Onsale, make money by purchasing products wholesale and then reselling them to the highest bidder on the Web. Others, like privately held eBay, gather a small charge from the selling party. Eventually, optimists hope, high traffic may attract advertisers willing to pay to put their name on the site.
Priceline.com, Stamford, Conn., sells plane tickets and new cars to bidding customers, then takes a small spread, depending on the amount the customer is willing to pay and the price that Priceline can get for the item. In other words, the customer willing to pay $400 for a plane ticket may get one that Priceline bought for $370. Officials at the privately held firm said the typical spreads have run about $10 on each of the 30,000 plane tickets sold in the last three months. The company occasionally does settle for breaking even on a transaction to help build volume though. Priceline has no plans to go public, a spokesman for the company said.
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