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Retailers live and die by trends, and these days a lot of Internet stores are suddenly out of fashion with investors. In fact, several e-tailers that were hot commodities as recently as late winter are apparently on the close-out rack. Just look at Pets.com. Despite quirky TV ads featuring a wisecracking canine puppet, the online pet shop isn't likely to turn a profit anytime soon. Its stock closed on June 2 at 2 1/32, down 83% from its 52-week high of 14.
Then there's eToys. Last holiday season, the online toy company was often touted as the Toys 'R' Us of the Net. Not anymore. The stock closed on June 2 at 6 1/8, some 93% below its 52-week high of 86. And the list goes on. CDNow, a high-flying online music merchant, came back to earth when its accountants warned in March that its cash was running low. Its June 2 close was 4 7/8, down 79% from its 52-week high of 23 1/4.
"In a Darwinian market, the flip side of survival of the fittest is the demise of the weakest," says Daniel Ries, an analyst with C.E. Unterberg, Towbin. "And the market is in the process of weeding the weak out." Indeed it is. In the past six months, an e-commerce index, eTailDEX, has lost nearly 50% of its value -- and more e-tailers may wind up in the clearance bin over the next few months.
PILES OF DOUGH.
And yet, some will survive. The not-so-surprising names that keep cropping up on analysts' shopping lists are Amazon.com, eBay, and Priceline.com. Each has a seasoned management team, cash, and what so far looks like a viable business model. With capital drying up for dot-coms, a pile of dough is a huge asset. At the end of March, eBay had $900 million in cash, and Priceline.com had $150 million. Priceline's hoard is expected to fall to around $100 million by the fourth quarter, when analysts expect it to start turning a profit. While Amazon isn't projected to be in the black until 2002, it has a cozy $1.2 billion in cash.
Clues to why cash is so important to e-tailers come from those that don't have any left. Take boo.com. The splashy international online retailer had big-name backers and big bucks. But the private company burned up its cash and had to close its virtual shop last month (see BW Online, "Why Ben Narasin Isn't Afraid of Boo.Com"). Buy.com, the self-proclaimed "Internet superstore," may run out money too, if you believe Wall Street analysts. They think it may burn through $130 million this year in an effort to attract customers with low prices. Buy.com's stock is trading just above 5, down from 37 7/16 shortly after it went public in February.
The buzz on the Street is that Amazon, eBay, and Priceline.com have one other source of resilience: "platform." That's dot-com lingo for a business model that should sustain a major expansion. For eBay, "platform" is a worldwide bazaar where buyers and sellers meet in cyberspace. For Priceline.com, it's name-your-price shopping for high-demand commodities and services. For Amazon, it's convenience. "These are the businesses that are the true game changers," says Lauren Cooks Levitan, an analyst at Robertson Stevens. "They're using the Internet to bring consumers and merchandise together."
GROWTH MODELS.
The three have one other important trait: They aren't complacent. eBay has expanded beyond kitsch and collectibles into auto sales, local-market auctions, and high-end gavel thumping through its Butterfield & Butterfield division. eBay's gross profit margin is 74%, and Ries expects it to earn 18 cents a share in 2000. He also expects the stock, now trading at 77 3/16, to reach 108 within a year, not too far below its 52-week high of 127 1/2. Sara Farley, an analyst with PaineWebber, is more optimistic. She expects eBay to hit $142 within 12 months.
Similarly, Priceline is busily expanding. Its customers can now bid on hotel rooms, groceries, gasoline, mortgages, telecommunications, and car rentals -- Hertz and Alamo recently signed up as partners. Farley expects Priceline.com's revenues to grow 50% a year for the next five years. She projects revenue of $1.4 billion in 2000, with an operating loss for the year of less than $25 million, equal to 11 cents a share. And she says the company should be profitable in the fourth quarter. Her 12-month target price for the stock is $125, vs. the $46.50 it closed at on June 2.
Amazon, meanwhile, has become more than just a bookseller. It offers its 20 million customers auctions, tools and hardware, lawn furniture, electronics, toys, software, and more, in its quest to become the Wal-Mart of the Net. And it has room to grow: The 4.5 million-square-foot distribution space it built last year is only 20% occupied. Cooks Levitan expects Amazon's sales to reach $2.8 billion in 2000, though she also expects the company to post a loss equal to $1.21 a share. By 2002, she expects that its sales will climb to $5.35 billion, and that it will earn $88 million, or 25 cents a share.
POSSIBLE WINNERS.
Other e-tailers will survive the shakeout, of course. For instance, 1-800 CONTACTS, an online seller of contact lenses, earned $6 million, or 96 cents a share, in 1999, and Ries expects it to earn $8.1 million, or $1.33 a share this year. And its stock could be a bargain: It closed at 30 1/8 on June 2, for a price-earnings ratio of nearly 23. Ries sees 1-800 CONTACTS' sales growing 40% annually over the near term. He also likes Outpost.com, figuring that the electronics and computer e-tailer should be able to boost margins now that fewer online electronic retailers sell items below cost. Ries expects the company to report a loss of $32 million this year, equal to $1.28 a share, though he sees the stock hitting as $20 within a year, vs. its close of 4 23/32 on June 2.
Cooks Levitan favors Alloy Online, a site that caters to teens. It has a niche in a hot market, and it has cash, including a recentinfusion of $55 million from Liberty Digital, a subsidiary of Liberty Media, which invests in interactive TV and Internet businesses. She also thinks her old favorite, eToys, could last long enough to get its act together and snap back this coming holiday season. "This is the time when they prove whether they can be the big business we think they can," she says.
Could be, but just remember: It isn't enough anymore to simply open an online store. Survival also requires some Old Economy qualities, such as good management, lots of cash, and a business model with legs.
By Louise Witt in Morristown, N.J.
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