In depth article on e-commerce--lot of data--worth a read
Is E-Commerce Stk Frenzy Signal Of
Disconnect From Reality?
Dow Jones Newswires
By Joelle Tessler
NEW YORK (Dow Jones)--The best example of the mania over electronic
commerce stocks this holiday season may have come after Internet auction
operator Onsale Inc. (ONSL) launched an online holiday store to sell cruises,
video games, computers and other gifts.
For three days following the late-November launch, Onsale's stock nearly
quadrupled, to 108 from 29.
At the time, Onsale was just the latest name on a growing list of retailers to be
rewarded with mind-boggling stock prices, and many had simply announced
plans to sell merchandise on the Web during the busy holiday time.
But Jeff Matthews, portfolio manager at RAM Partners, believes the steep
jump in Onsale's stock illustrates just how far out Wall Street's holiday feeding
frenzy has gotten.
After all, most of the items being sold in Onsale's holiday store were already
available on other parts of the company's Web site. In other words, little had
changed.
"This was the most ludicrous excuse for taking a stock up $80," Matthews
said.
Even though Christmas 1998 will undoubtedly be a watershed year for online
sales because more consumers and more retailers are on the Web than ever
before, several industry experts are cautioning that many e-commerce stock
investors have lost sight of reality.
Actual Internet sales this Christmas may have a tough time living up to inflated
expectations, they warned. And disappointment could eventually lead to some
steep stock price declines, possibly as soon as early next year, as
fourth-quarter earnings reports start rolling in.
"These run-ups are in anticipation of something that may or may not happen,"
said Volpe Brown Whelan analyst Derek Brown. "Investors should beware
that expectations could be too high."
David Simons, managing director of Digital Video Investments, traces the
start of the frenzy to the release of a series of projections on electronic
commerce beginning in the second week of November.
Those included a Dell Computer Corp. (DELL) survey, which found that
43% of Americans who use computers said they are likely to shop online this
holiday season, compared with 10% who shopped online in the 1997 holiday
period.
A Jupiter Communications report projecting that shoppers will spend $2.3
billion online this Christmas season, up from $1.1 billion in the 1997 holiday
season, has also fueled the rise. So has a Forrester Research projection that
online consumer sales will total $3.5 billion in the fourth quarter of 1998, up
from $1 billion in the fourth quarter of 1997.
Adding to the enthusiasm over these rosy projections, non-stop advertising
for the Web sites of both established offline retailers and online-only players
has sparked intense interest among retail investors.
"We are seeing a lot of hype and a lot of inflation around anything.com," said
Forrester Research analyst Kate Delhagen.
No further information is available at this time.
In this environment, renewed interest in the stock market - investors have put
the late-summer correction behind them - has pushed electronic commerce
stocks to the stratosphere. Day traders, who quickly discovered that the mere
mention of a Web site launch could send a stock soaring, have fueled the
upward momentum.
So has a shortage of publicly-traded, pure electronic commerce plays. With
about only 15 well-known names - companies like Amazon.com Inc.
(AMZN), eBay Inc. (EBAY) and CDNow Inc. (CDNW) - in the group
"there was a huge discrepancy between supply and demand," Volpe Brown
analyst Brown said.
It is this discrepancy that has caused the stocks of even tiny, obscure
companies like Bluefly Inc. (BFLY), which recently sold off its golf
sportswear business and opened an online designer clothing outlet, and
Books-A-Million Inc. (BAMM), an offline bookseller that recently beefed up
its Web site, to spike 500%, 600% or 700% in a day.
Yet, some experts believe many investors have forgotten that the industry is
still emerging and establishing itself.
Perhaps the starkest reminder of how small electronic commerce is right now
is one simple fact: online sales are expected to represent less than one half of
1% of the $1.7 trillion in total consumer sales projected for 1998, according
to Forrester Research's estimates.
The stock values of most electronic commerce retailers, dubbed "e-tailers,"
don't reflect that, many believe. Simons calculated that as of Nov. 25, the
market capitalization of the nine electronic commerce pure-plays with market
caps above $100 million totaled $23 billion - 10 times Jupiter's online sales
forcast for the holiday season.
Many shareholders, of course, reason that electronic commerce stocks
cannot be valued on the prospects for this Christmas alone. And Forrester
expects online sales to grow to 6% of total consumer sales by 2003.
Still, Digital Video Investments' Simons stressed that there is reason to be
cautious about all the projections. After all, he noted, "hard data remains as
scarce as profits" in this business since Commerce Department figures don't
break out online sales from overall retail sales and there is no Johnson
Redbook-like report for electronic commerce.
Yet, even if the projections prove to be accurate, experts said the risks of the
business will only increase in the coming years. Even as the stock market puffs
up the shares of online-only retailers, the group is facing the onslaught of
offline giants - many of which are late to the cyberspace game, but have no
intention of being left out.
According to Delhagen, almost half of the major bricks-and-mortar merchants
are already open for business on the Web and many others "will get serious in
1999."
J.C. Penney Co. (JCP), for instance, has been selling things online for some
time, while Kmart Corp. (KM) is "toe-dipping" to test the waters, Delhagen
said. And Wal-Mart Stores Inc. (WMT) is selling a lot online, although it has
yet to really market its Web presence, she added.
What companies like these bring to Web, Simons said, are established,
well-known brand names and enormous buying power - and lots of
competition.
Moreover, Digital Video Investments' Simons said he believes many
e-commerce investors have overlooked an even bigger source of competition:
catalog companies. Catalogs, after all, offer the same 24-hour service and
shop-in-your-pajamas convenience as the Web.
In the end, Forrester Research's Delhagen said, a wave of consolidation will
leave a couple of leading general-merchandise retailers and lots of niche
players - many of which will ultimately fold, sell their Web operations or be
bought.
This consolidation, she added, has already begun with the planned merger of
online music merchants CDNow and N2K Inc. (NTKI). The companies are
combining largely to better compete with Amazon, which recently started
selling music online.
Meanwhile Amazon, which started as a bookseller, has been expanding into
other product categories and will likely emerge as one of the handful of
general merchandise giants, Delhagen said.
While experts agree that some sort of industry shakeout is inevitable over the
next few years, some believe many stocks in the group could be headed for a
shakeout even sooner. That's because fourth-quarter earnings reports will give
investors an opportunity to see how much these companies are actually
selling.
"Once the holiday season ends, investors are going to review their portfolios...
and determine which companies are taking market share and continue to have
accelerating business momentum," Volpe Whelan's Brown said.
Brown, who estimates the major companies in the group will average 200%
year-over-year revenue growth in the fourth quarter, added that "companies
are looking to break out of the pack this holiday season."
Many experts noted that the market could punish those companies that don't
succeed. "There will be a flight to quality, the same way right now there is a
flight away from quality," Ram Partners' Matthews said. "The speculative stuff
will get slammed."
Matthews added that the e-tailing stocks could also experience the
"post-partum blues" that normally hit traditional retailers at this time of year -
running up in front of the holidays and lagging after they are over.
Simons stressed, however, that the factor that will most determine how the
electronic retailing stocks behave after the holiday season will be the mood of
the broader stock market. If money is still flowing to Wall Street, he said,
Web stocks will probably continue to climb.
But sooner or later, Simons maintained, the end will come. At some point,
Matthews agreed, investors will step back and take a good, hard look at the
inflated valuations of their holdings - and the bubble will burst.
"It's like Wilde E. Coyote," Matthews said. "He never falls until he looks
down... Once this fever breaks, people will say 'What do I own?"'
-Joelle Tessler; 201-938-5285
|
