Shopping for Bargains Among Electronic-Commerce Stocks
Today Cutting Edge introduces a biweekly column, Investor’s Edge, by Times staff writer Edward Silver. It will spotlight trends and strategies in the technology stock market.
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Investors who aren’t eager to chase the high-priced, high-profile electronic-commerce stocks don’t have to give up on this promising new industry. They can just take their cue from the bargain hunters who rummage the real-world malls and shop around.
Yes, there is an e-commerce business beyond Amazon.com, EBay and E-Trade Group. Stocks that offer better value may have been overlooked, or, like Preview Travel and Beyond.com, might be positioned to take advantage of the next phase of the Internet’s constant reinvention. Companies like BroadVision that sell tools to build effective online shops can also look forward to blossoming demand.
But February was a lukewarm month for this recently hot group, and there are good reasons to expect profit-taking to persist.
Last week’s leap in interest rates is a negative for the market as a whole. Among Internet stocks, supply is increasing to meet demand, as a slew of initial and secondary offerings hit the market and limits on insider sales expire for some of last year’s IPOs. The holiday shopping season that pumped up online retailers has come and gone, and this quarter’s results may be underwhelming by comparison, many analysts say.
Scariest of all, the e-commerce firms may be obliged to start proving that they can turn eyeballs into earnings. But in many cases, expectations of profits are being put on hold as e-tailers wage price wars and plow their resources into building their brands.
The cost of competing is one reason analyst Lauren Cooks Levitan of BancBoston Robertson Stephens sees a shakeout coming.
“I don’t think we will end up with 50 pure-play e-commerce companies,” she said. “We will have a handful of franchises, and the balance will be hybrid traditional retailers and catalog companies that have well-developed Web presences.”
Levitan expects the languishing stock of San Francisco-based Preview Travel (ticker: PTVL), the only publicly traded Internet travel service, to eventually take off. The travel industry is ripe for change, she says, as more vacationers embrace the Web’s round-the-clock convenience.
Currently, the industry suffers from a poor “look-to-book” ratio: Surfers like to do research at travel sites but usually buy tickets offline. Preview’s detractors also point to competition from Microsoft’s Expedia, Sabre Group’s Travelocity and the airlines’ own Web sites. The departure of Preview’s chief executive, Ken Orton, two weeks ago didn’t help the stock, either.
But the bullish Levitan said Preview’s recent make-over has made its site more attractive and easier to use. The high-margin advertising component of Preview’s business is growing fast, she said, adding that its marketing alliance with America Online, high traffic and relatively low valuation--about $276 million--make it an inviting target for an offline firm eyeing the huge potential of online travel.
Like Preview, Beyond.com (BYND) is waiting for its market to gel. Some analysts see the firm dominating online software retailing, a business that could thrive when the coming bandwidth boom shrinks the time it takes to download programs.
“Among the Web software retailers, Beyond is the one to own, but we have to keep our eye on Amazon. The hope is that they can build their brand between now and Amazon’s entry,” said Paul Cook, lead manager of the Munder NetNet fund, an Internet portfolio that returned 97% in 1998. Last week, Beyond announced that it would acquire rival BuyDirect.com, giving it the bulk to shoot for category-killer status.
Beyond, based in Sunnyvale, Calif., missed analysts’ estimates for the quarter ended in December, losing 53 cents a share as marketing costs spiked. But the scale of the market ahead is what fans find compelling.
Researcher Jupiter Communications forecasts that 35% of software sales will be made online in 2002, as opposed to 11% of book sales. “It’s the ultimate captive audience, since every customer on the Web has a computer,” said e-commerce analyst Stephen Franco of Piper Jaffray.
Banking on the theme of offline-online hybrids, NetNet’s Cook has been adding names like Gap (GPS) and Office Depot (ODP) to his fund. Both are successfully adapting their proven brands to the Web, he says. And he likes the fact that they are the first big players in wide-open fields--”there’s no Amazon in their space.”
Indeed, offline retailers are getting gung-ho about the Web, and they have the budgets, if not always the vision, to invest in state-of-the-art sites. For sellers of e-commerce tools, the trend means multiplying revenue streams. Such “enabler” firms have no need to market to the masses, and some actually post earnings.
Among them is BroadVision (BVSN), whose software helps e-tailers “personalize” their stores. Exploiting the Web’s powers of persuasion, BroadVision tracks user activity at a site and presents targeted ads or services to him or her on the next visit. The Redwood City, Calif., company earned 8 cents a share in the fourth quarter on $16 million in revenue.
“I would love to be a salesman for BroadVision,” said Bill Burnham, e-commerce analyst with Credit Suisse First Boston. “This is going to be a very valuable piece of software over the long run.”
From the vantage point of a value investor, the stock isn’t cheap, having run to about $45 from the single digits a year ago, before the target market caught up with the technology. Now the client list includes American Airlines, Cisco Systems, Kodak and Citibank.
Still, the stock trades at a price-to-sales ratio of about 22. Compare that to ticket vendor Ticketmaster Online-CitySearch, for instance, which carries a P/S ratio of 84.
To be sure, taking a position in a commerce enabler company--the expanding pack includes Digital River, Security First Technologies and Vignette, which went public only 10 days ago--is taking a hefty risk. Their sales cycles expose them to shortfalls in the final month of each quarter, and there’s always the threat of their technology becoming obsolete.
But compared with the e-tailers, Burnham said, “they’ve got clearer near-term prospects. Right now, I’m more comfortable with their valuations.”
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Virtual Value
Companies in an emerging industry such as electronic commerce tend to be judged more by the opportunity before them than their quarterly financial results. Because few pure Internet firms are profitable, investors sometimes gauge their value as a multiple of sales rather than earnings. Traditional retailers Gap and Office Depot have recently begun selling on the Net.
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Friday Analysts’ Price- Ticker closing estimated EPS* to-sales Company symbol price for current qtr. ratio Office Depot ODP 36.00 0.39 1.1 Gap GPS 64.69 0.27 4.1 Preview Travel PTVL $20.38 --$0.45 16.5 Beyond.com BYND 26.00 --0.75 19.4 BroadVision BVSN 44.88 0.08 21.7
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* Earnings per share
Sources: Bloomberg News, Zacks Investment Research
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Times staff writer Edward Silver can be reached via e-mail at edward.silver@latimes.com.
