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Online Sales Rise, but E-Commerce Stocks Soar

After huge gains for Amazon and others, a good holiday season for e-commerce may not be good enough.

Online sales are surging again this holiday season, in contrast to results at the nation's biggest off-line retailers. But the growth may not be enough to support e-commerce companies' sky-high valuations.

The latest data indicate that e-commerce sales are up 20% to 35% this holiday season. While impressive, that amount falls short of some of the more optimistic predictions from analysts. Forrester Research, for instance, projected that online sales this holiday season would grow by 42% vs. last year. While indicating healthy sales growth, none of the major e-commerce estimates for this year have come close to recording 42% growth.

The sales increase also trails far behind the dramatic gains that many e-commerce stocks have posted in the last year. Shares of

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have risen 167% thus far in 2003, despite falling more than 19% since hitting a 52-week high above $61 on Oct. 21.

Amazon and other e-commerce companies are "priced for perfection," said Ken Broad, a portfolio manager at Transamerica Investment Management. To the extent that sales don't meet expectations, "it could be the most material catalyst in the near term for these stocks not doing well." (Broad currently has no positions in e-commerce retailers.)

Unlike their off-line retail rivals, many of which release monthly sales results, the online players tend to release their revenue figures only once a quarter. Furthermore, research companies that track e-commerce sales don't release sales results for individual retailers. So any intraquarter projections of their sales or earnings are preliminary and subject to revision.

Initial indications are that holiday e-commerce sales are growing impressively this year. Shopping comparison and research site estimates that from the Monday before Thanksgiving through last Sunday, shoppers spent $6.2 billion at U.S. online stores. That amount, which excludes auction and travel sales, was up 20% from the same period last year.

Online research company ComScore Networks projects that sales are growing at an even faster clip. From Nov. 1 through Friday, online sales grew 30% over the same period a year ago to $8.9 billion, according to ComScore.

Those estimates put the growth this year in the same range as that recorded last year. In 2002's fourth quarter, e-commerce sales grew 27.6% on an annual basis, to $13.8 billion, according to the U.S. Census Bureau. Such sales, which exclude revenue generated by travel or ticketing sites, amounted to 1.6% of overall retail sales in last year's fourth quarter.

By those estimates, e-commerce is growing several times faster than overall retail sales. The National Retail Federation, for instance, has projected that core retail sales will grow 5.7% in November and December over the same period last year. The NRF estimates that such sales grew by 4.8% annually in November.

Meanwhile, the booming online sales come in contrast to some disappointing sales from so-called brick-and-mortar retailers.


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, for instance,

reported on Monday that its December sales are coming in below its plan. Rival


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said its sales this month are coming in at the

low end of its plan.

While online commerce appears to be performing well this year, it might not meet the outsized expectations of investors and analysts.

Furthermore, the overall growth rates may fall in coming days as Christmas nears. E-commerce sales tend to taper off the closer Christmas gets, because the deadlines for free or reduced shipping pass, and some shippers can no longer guarantee that items will arrive in time.

But even if the sales growth rates stay healthy, they may not be mirrored by companies' bottom lines. Despite increased sales,

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, for instance, has struggled with mounting losses all year. While its fourth-quarter sales grew 28% last year, Amazon's per-share profit remained stuck at the same level it posted in the same period the year before: a penny a share.

With their appreciation over the last year, e-commerce shares have little room to disappoint investors on either the top or bottom line. In addition to Amazon's rise,



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shares are up 69% for the year, and's have risen 46%.

Similar gains by other e-commerce players such as

GSI Commerce




have left many of the leading companies with valuations north of 50 times next year's projected earnings. But that figure actually understates their current valuations, because the earnings estimates used to calculate them typically do not include the cost of stock options or other noncash charges that weigh heavily on the bottom lines of such companies.

"In general, expectations seem to have gotten up there pretty good in a number of these names," said one hedge fund manager, who asked not to be named. The manager's fund is short Amazon and Overstock. With Amazon in particular, "the disconnect between its current price and its

real valuation seems steep," the manager said.

In contrast to its triple-digit share gains over the last year, Amazon projects that its sales will grow 23% to 34% on an annual basis in the fourth quarter. eBay has forecast that its revenue will be up about 40% from the holiday quarter last year, again a slower rate than its shares have appreciated.

On Tuesday, Amazon shares fell 91 cents, or 1.8% to $49.50, while eBay rose 32 cents, or 0.6%, to $57.59, and gained 93 cents, or 5.1%, to $19.35.