EToys Rockets in Biggest Debut for Southland IPO

Santa Monica-based EToys cashed in on investors’ enthusiasm for all things Internet on Thursday as the online toy retailer saw its stock skyrocket in its first day of trading to a value of $7.78 billion.

Although the upstart company is a bit player in the overall toy industry and hasn’t earned a profit in its two years of operation, it ended trading Thursday with a higher market value than such industry titans as Toys R Us and Mattel.

Enthusiasm for EToys underscores the degree to which investors expect the Internet to change the way Americans live, shop and conduct business. EToys’ initial public offering again demonstrates the power of the “.com” connection and faith in the future of electronic commerce.

The company’s stock market performance made it the most successful launch of an IPO by a Southern California company. Traders ran the company’s shares up 283% during the course of trading Thursday--more than General Motors has gained in a decade.

In the first trade of the day, EToys shares rocketed from $20 to $78 and soon hit a high of $85 in heavy trading. Over the next two hours, the price slid steadily to a low of $71.31, then rose again, finishing the day at $76.56 on Nasdaq.

“EToys can take its place in the pantheon of core Internet stocks, like an Amazon.com or an EBay,” said Gail Bronson, senior analyst with IPO Monitor in Palo Alto. “Unless they go off track in some unforeseen way, EToys has the capability of always being first” among online toy retailers.

EToys takes advantage of its Internet ties by using technology to improve customer service. For example, the company provides instant toy reviews, sends e-mail reminders of upcoming birthdays and electronically alerts customers when popular products are in stock.

And to broaden its appeal among parents, EToys last month agreed to buy San Francisco-based BabyCenter, which operates a Web site for new and expectant parents.

Yet, since 1997, EToys has sold just $30 million worth of toys, video games, software and music to 365,000 customers. In fact, the company has lost $30.8 million since it was founded and expects to lose money into the foreseeable future.

For that reason, traditional toy stores have been slow to embrace the Internet.

Last month, Toys R Us announced plans to spend $80 million to revamp its Web site, which has not significantly contributed to the company’s revenue. Rival toy seller KB Toys decided just this week to combine its online operations with EToys competitor BrainPlay.com in another $80-million venture. Wal-Mart Stores, the nation’s biggest toy retailer, sells only a narrow slice of its merchandise at its Web site, which pales in comparison to EToys’ online inventory of 9,500 items.

Much of EToys’ success is due to Toby Lenk, its 37-year-old founder, president and chief executive. A former vice president of strategic planning at Disney, Lenk is admired for his marketing prowess and deal-making ability.

And he was rewarded for his efforts--at least on paper. At the end of the trading day, Lenk’s stake in the company was valued at $547 million.

By far the biggest beneficiary, though, was Idealab, the Pasadena-based business incubator that helped create EToys. Idealab’s stock was worth $1.4 billion at the close of the market. Intel, another big EToys backer, saw the value of its stake balloon to $589 million.

In one day, EToys vaulted to a rank of 426 in market value among all publicly traded companies. That put it in the same league as such established corporations as Kmart, Hershey Foods and British Airways. Tiny EToys--with a mere 306 full-time employees--instantly became worth more than industrial giants like Raytheon and Occidental Petroleum, according to figures compiled by MSN MoneyCentral.

“It’s a very surrealistic comparison,” said David Menlow, president of IPO Financial Network in Springfield, N.J.

Just because the stock had a great debut doesn’t mean it will hold its value over time. TheGlobe.com, a New York Internet company that recorded the biggest one-day gain ever in a public offering, currently trades at $19.44. That’s comfortably above its $9 IPO price but well below the $63.50 per share it was worth at the end of its first day of trading.

“We’ve seen most of these Internet plays fall back to Earth,” Bronson said. “But I don’t see any reason [EToys] can’t be a $50 or $60 stock that moves up in a well-managed way to a $100 stock.”