The Day Ahead: Beware the e-tailing trap

'Bargain hunting' is not recommended

Commentary: If you've been watching shares of eToys in recent days, you may have had a few 1999 flashbacks. EToys shares received a Black Friday bump and have more than doubled.

Of course, eToys has doubled to $2 -- not its 52-week high of $70 -- but you still could have made some money. Here's the logic behind the gains. EToys is really good at selling toys and the e-tailing stats look strong so far. We have a rally.

Not so fast. For all we know, eToyshas already received its obligatory Christmas run-up -- to $2. Woo-hoo!. And that's the danger of trying to hop on an e-tailing bandwagon. Amazon.com, Buy.com, Barnesandnoble.com and others are likely to see some kind of holiday cheer, but it won't last for long because some of these alleged bargains are fatally flawed.

A Goldman Sachs research note Monday was blunt. "Despite early strength in holiday revenue and satisfaction levels, we do not believe there will be a broad sector rally," said Goldman analyst Anthony Noto. "We do not recommend 'bargain hunting' for stocks and continue to believe only a few stocks will appreciate due to holiday strength."

Noto declined to indicate what stocks would appreciate, but it would be guesswork anyway.

For eToys, the company should be able to deliver on expectations for the December quarter, but there are a few other issues. Simply put, it's not clear eToys will be a survivor. ABN AMRO reckons eToys is worth $6 a share, but admits the "valuation is tricky" because of risk and dilution.

The dilution part is the biggy. EToys has $100m in convertible preferred debt, which converts debt to common stock. Since eToys' shares have plunged more than 80 percent from this time last year, the company will have to issue truckloads of shares to pay down the debt.

EToys' preferred debt investors could have converted shares at will if shares traded below $2.30 for three consecutive days. The e-tailer renegotiated to put off the conversion to 31 December after its shares tanked, analysts said. Nevertheless, the dilution cloud remains.

With eToys, you have a strong consumer brand, tons of potential dilution and the need for more funding before the company breaks even. It's a mixed bag. And like most e-tailing stocks, the risks outweigh the rewards.

Noto figures half of the 22 public e-commerce companies will have to raise cash before holiday season 2001. By mid-2001, the e-tailing winners will be chosen. Is it really worth placing your bets now?

E-Stamps ditched its Internet postage business and cut a big chunk of its work force so it can focus on shipping and logistics. Investors whooped it up as E-Stamps shares jumped 44 percent to a whopping 40 cents.

For those euphoric types, I have a question: what do you call this company now?

If you take the Stamps out of E-Stamps, you're left with "E". E-Shipping? E-Logistics? E-Something.

Maybe E-Stamps will figure out its name, role and business model a bit later, but the company's focus on "Web-based shipping and logistics solutions" is a bit fuzzy. Sure, E-Stamps is targeting an $8bn market, but the company only had $1.8mn in revenue for its third quarter. And it's not like the shipping and logistics turf hasn't already been staked out.

According to regulatory filings, the company's logistics and shipping products compete against TanData, GoShip.com, BITS/Internet Shipper.net, Kewill Systems, PackageNet, Virtan/Smartship, and Stamps.com.

E-Stamps has about $40m in cash left to get some traction. Its Internet postage business was doomed because it required hardware. Stamps.com, which has $290m in the bank and a lot of problems of its own, is based on software. Stamps.com has more traction for Internet postage, but it's still not clear the company will make it as an independent concern. Maybe Internet postage isn't all it's cracked up to be.

Speaking of ideas that didn't work ...

Just last week, Intuit execs said on a conference call that the company's online insurance business wasn't where it needed to be. Apparently, Intuit's insurance business wasn't going to gain traction anytime soon.

Intuit said Monday that it would hand off its insurance business to Insweb, a troubled online insurance marketplace. Under the deal, Intuit gets a 16.6 percent stake in Insweb, which garners a strong customer base. Insweb, which will power Intuit's insurance offerings for five years, gets $10m in annual revenue in the first year of the deal and $5m in cash.

The big question is whether online insurance is a market worth tackling. Intuit obviously couldn't make it work and Insweb has been struggling to survive for a year. Meanwhile, the insurance industry, whose main mission is to protect agents' commissions, is among the most unhip to the Web. Overall, the Intuit deal is great for Insweb, but don't expect an insurance revolution.

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