Dow Jones Newswires -- November 25, 1998
Web Retailer Stks Swell As Holiday Season Approaches
By Scott Eden
NEW YORK (Dow Jones)--As investors anticipate a move by holiday shoppers toward modems and away
from strip malls, stocks of Internet retailers continue to swell Wednesday despite wide-spread knowledge
that profits for most Web merchants are still a long way off.
According to most industry watchers, Web retailers won't see black on their bottom lines until late 2000
or early 2001. Firms will spend revenue from a good holiday cyber-season on marketing, brand
enhancement, and technology development, dragging financial results into the next century.
That might make for some post-holiday blues among investors dealing in Internet stocks. "There's a
chance that after the holiday season, (Internet stocks) might pull back," Adams Harkness & Hill analyst
Kevin Wagner said, citing a return to normal business conditions come January and the realization that
losses will beset Web companies for the foreseeable future.
But investors have long known that robust spending will continue as an essential business strategy among
online retailers, so continued losses may not spook market participants too much. "This has been a part of
the Internet strategy from day one," said Volpe Brown Whalen analyst Derek Brown.
Industry watchers also noted the irrational character of the recent run-up in Internet issues in general.
Roy Lobo, an analyst with Moors & Cabot/Dankin, said increased online spending doesn't fully explain
the explosion in Web-retailer stock prices.
"I think there's absolutely no rationale to this," Lobo said. When the season comes to an end, therefore,
Lobo doesn't anticipate a pull-back in share prices. He explained that during the broad stock market
correction in August, Internet issues remained relatively unscathed.
Volpe Brown Whalen's Brown said high expectations among analysts for online holiday sales partly
explains the recent run-up. In addition, he noted, because only a "handful" of electronic commerce plays
exist for investors to take advantage of in the public sphere, demand increases and prices soar.
Among those companies, he mentioned Preview Travel Inc. (PVTL), Onsale Inc. (ONSL), Egghead.com
Inc. (EGGS), Cyberian Outpost Inc. (COOL), Beyond.com (BYND) and Digital River Inc. (DRIV).
The holiday season will administer a sort of litmus test for these burgeoning companies, Brown said,
depending on whether they meet, outdo, or underperform Wall Street's vaunted fourth-quarter
expectations.
Analysts will also look to see whether a general increase in online business will overshadow any
post-holiday slowdown.
In afternoon trading Wednesday, Onsale shares posted its second double digit gain in as many days, rising
28.7%, or 12 1/4, to 55 7/8.
CDNow shares moved at 16 1/4, up 1 3/4, or 12.1%, alongside its compact-disc selling merger partner
N2K Inc. (NTKI), whose stock traded up 14.3%, or 1 5/8, to 13. Preview Travel shares, meanwhile,
changed hands at 17 3/8, up 2 1/4, or 14.9%; Cyberian Outpost jumped 8%, or 3 1/8, to 40 3/4; and
Egghead.com added 14%, or 2 1/2, to 20 3/4.
Leading the charge was online bookseller Books-A-Million Inc., which unveiled an enhanced Web site. Its
stock jumped 200%, or 8 5/8, to 13.
Compared with bellwether Internet companies like Ebay Inc. (EBAY) and Amazon.com (AMZN),
second-tier Web retailers are trading at "more earthly" earnings multiples, said Steve Harmon, senior
investment analysts for Internet.com, an Internet news and analysis firm.
Harmon noted, however, that investors have built such high holiday sales expectations into those stocks
that one Christmas season alone won't boost revenue enough to meet current stock-price levels.
The biggest question still remains a long term issue, Harmon said. As consumer buying patterns change,
evolving toward the Internet, investors must place their bets on which companies will survive, and which
ones will fail.
To survive, aggressive growth is essential, and growth isn't possible without spending.
"In these early stages," Harmon said, "profits don't really mean anything... it's all about who's in it for the
long haul."
Over the last two weeks, high profile initial public offerings and one Web megamerger - between
Netscape Communications Corp. (NSCP) and America Online Inc. (AOL) - have boosted awareness of
smaller Internet companies. This combined with an approaching holiday season has seen Web-retailer
stocks take flight.
Also, recent Web-site launches have sparked euphoria among investors. Nine major Internet retailers are
banding together to form an online mall, an attempt to stave aggressive expansion by Amazon.com.
Participants including compact disc purveyor CDNow Inc. and travel service provider Preview Travel.
Meanwhile, investors took notice of Ebay competitor Onsale Inc. after the Internet auction house
announced a new holiday shopping site Tuesday. And on Wednesday, Sportsline USA (SPLN) unveiled a
special seasonal section on its sports paraphernalia retail site. Its stock traded recently at 18 3/4, up 3 3/8,
or 22%.
-Scott Eden; 201-938-5173 |
