Tech Outlook: Pity the Poor E-Tailer

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Pity the poor e-tailers! These stocks have been among the most battered on the Nasdaq Composite Index as investors remembered that, yes, while spending lots to get market share has a certain je ne sais quoi, actual profits are even nicer. Companies without a plan to make money soon were punished accordingly.

In the second quarter, there was more to worry about than the bottom line, as slower-than-expected revenue growth at Amazon.com (AMZN) sparked fears that demand at the company's main book business was slackening. "The fact that their book business is down sequentially made visible what has been going on for a year," says Jeff Matthews, of RAM Partners, who is short the stock. "It made it black and white to people who have been sort of blindly drinking the Kool-Aid."

The 39 Steps E-Tail stocks stand down.

Investor attention is still firmly fixed on the Big Three of the new economy: Amazon, eBay (EBAY) and priceline.com (PCLN). All are well off their highs. The fate of the little guys is going to be even less certain: Merrill Lynch's Henry Blodget recently downgraded a third of the stocks he covers, including low single-digit stars like eToys (ETYS) and Pets.com (IPET), in what he called a "resetting" of his ratings.

Now anxious e-tailers are buckling down to prepare for the fourth quarter, when many get their biggest chunk of sales. While many expect these stocks to rally in anticipation of holiday shopping, the e-tailers' mission isn't easy: Boost revenues and stick to the straight and narrow path to profitability even while dealing with smaller marketing budgets and the pressure that comes only from single-digit stock prices. Yikes! These guys deserve some pity.

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