Internet Companies (3 of 'Em) Return to the IPO Trough

By Avi Stieglitz
Staff Reporter

Unlike Elvis, the Web is not dead.

In the paper-mulch newspapers, stories of Internet financial doom and gloom proliferate. And last October's failed Wired IPO put a chill on Internet investing. But these days on Wall Street, the Internet commerce crowd is back at the trough.

Auto-By-Tel (ABTL:Nasdaq), a site that allows consumers to shop for new and used cars from home, is slated to go public this week. Two other Web firms, Amazon.com (AMZN:Nasdaq), an online bookseller, and Onsale (ONSL:Nasdaq), which provides auction services on the Web, are expected to follow shortly, having filed documents with the Securities and Exchange Commission.

These three firms provide the first real test for Internet IPOs since Wired's debacle. And it should be a positive one.

First, according to some Internet-minded analysts, these firms are apples and oranges from their Internet-IPO predecessor.

Manish Shah, publisher of IPO Maven, says flatly that Wired should not be considered representative of the new Internet offerings. "It was a concept; it never had a model for making money," he says.

Second, overall sentiment on Internet profitability shifted dramatically in January when Yahoo! ((YHOO)YHOO), the largest navigational site, announced that it broke even for the fourth quarter of fiscal 1996, ahead of analysts' expectations. Bolstering the argument that the Web had become a viable medium for business, the company reported that its advertiser base jumped from 340 in the previous quarter to 550.

Finally, the three companies going public are among the strongest of the Internet companies out there.

But just because the Internet is gaining momentum and the three companies going public are hot, doesn't mean that their stocks are going to be bargain investments.

"I think they will find initial support at the IPO, but I seriously doubt that they will go much higher" right away, says Shah.

Amazon.com

Of the three, the most promising is Amazon.com, according to IPO analysts. Sales for the bookseller, which offers more than 2.5 million titles, reached almost $16 million in 1996 as compounded quarterly growth for the year exceeded 100%.

Since opening as the "Earth's Biggest Bookstore" in July 1995, the site has been critically acclaimed for its ease of use, wide selection and compelling content. (It garnered a spot on Time magazine's list of the 10 best Web sites of 1996.) Meanwhile, the number of daily visits to the site has multiplied from 2,200 in December 1995 to 50,000 in December 1996.

Still, the company openly states in its prospectus that it will "incur substantial operating losses for the foreseeable future." Not exactly the words associated with an investing home run.

"I tend to be optimistic about the company's fundamentals, but not about the valuation at $300 million," says Shah. He believes that the company would be fairly valued at about $150 million.

The looming threat for Amazon.com and its razor-thin operating margins is the low barrier to entry and competition from traditional booksellers like Barnes & Noble ((BKS)BKS) and Borders Group ((BGP)BGP). Barnes & Noble launched a site to sell books on America Online earlier this month and is expected to open its own site later this spring.

Nichole Vanderbilt, an analyst with Jupiter Communications, is cautiously optimistic about the long-term prospects for the company. "Barnes & Noble knows how to sell books, but do they know how to sell them online? That remains to be seen," says Vanderbilt.

Auto-By-Tel

Auto-By-Tel uses one of the new one-stop, no-haggle approaches to selling cars that have stirred the waters in the normally staid auto industry. Along with Wayne Huizenga's Republic Industries ((RWIN)RWIN), this venture promises to give consumers both value and convenience. In addition to directing consumers to dealers that have the car model and type they are looking for, the company plans to offer financing and insurance arrangements.

The difficulty lies in converting this promise to reality. One obstacle the company is encountering is getting the dealers that subscribe to its service to sign exclusive agreements. As of Jan. 30, only 24% of its dealers signed the deal, and the company says in its prospectus that there is no assurance that it can get the other dealers to sign.

While they have no major competitors just yet, even in a best-case scenario, Auto-By-Tel is looking at several more years of operating losses in an industry with relatively low barriers to entry. "There has to be a point when losses turn to profits," says a skeptical Shah.

"There is a slower desire to buy a $25,000 item on the Internet than a $25 item that is a book," says Steve Harmon, senior investment analyst of the Internet Daily Stock Report.

Onsale

Onsale, the smallest of the three offerings, is not fortunate enough to have its own market. The company, which offers computer and other electronic goods through a 24-hour-a-day auction service, has to contend with an auction site on AOL and electronic commerce sites like the Internet Shopping Network, a subsidiary of the Home Shopping Network ((HSNI)HSNI).

"Increased competition is likely to result in reduced operating margins, loss of market share and a diminished brand franchise," the company concedes in its prospectus. Still, Harmon says that despite the risks, with a market cap of only 4.6 times expected 1997 sales -- compared with 19 for Auto-By-Tel and 11 for Amazon.com -- he thinks that Onsale's stock offers the most value.

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