E-Commerce Stocks Get a Lump of Coal for Christmas

Competition from Amazon and shrinking margins turn off Grinch-like investors.
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SAN FRANCISCO -- Wall Street, shunning the uncertainty of online retailing in favor of the B2B craze, is trashing most e-tailing stocks like ad supplements in Sunday papers.

Aside from

Amazon.com

(AMZN) - Get Report

, which is up 15% over the past month, major e-tailers are down in the same period.

eToys

(ETYS)

,

barnesandnoble.com

(BNBN)

,

eBay

(EBAY) - Get Report

,

CDnow

(CDNW)

,

Beyond.com

(BYND) - Get Report

,

Egghead.com

(EGGS)

and

Cyberian Outpost

(COOL)

are down between 10% and 50%, while the

Nasdaq Composite Index

is up 19%. CDnow hit a 52-week low of 10 13/16, while eToys, barnesandnoble.com, Beyond.com and Egghead.com are skimming their 1999 lows.

Not a Jolly Time of the Year for E-Commerce Stocks

This isn't the way it's supposed to happen. Last year, e-commerce stocks surged between Thanksgiving and Christmas: Amazon.com rose 80%, Egghead.com rose 125% and CDnow rose about 90%.

Many are being dragged down because of competition from Amazon, the shift of money away from business-to-consumer stocks and into business-to-business stocks and skepticism among investors over these companies' shrinking margins.

"

Commerce One

(CMRC)

signs a deal with

General Motors

(GM) - Get Report

;

Ariba

(ARBA)

signs a deal with

Ford

(F) - Get Report

. That's something you can sink your teeth into," says Steve Demirjian, a portfolio manager with

Westfield Capital Management

. His firm holds shares of Commerce One and Ariba. Those kinds of deals are much more meaningful for a company, he says, than someone buying $30 worth of music CDs or software.

During the past month, Commerce One is up 84%,

VerticalNet

(VERT)

is up 45%,

Chemdex

(CMDX)

has doubled and Ariba rose 65%.

Given those returns, online retailing pales, especially considering the widespread reports of shipping problems. Amazon has been struggling with a

labor shortage. And auction site eBay has been hurt as daytraders watch the number of items up for auction

sink as the holiday nears.

Worst off is eToys, which sold out of some of this season's most popular items, including

Pokemon skateboards, three styles of Pokemon watches and the kid-sized Barbie

battery-powered Jeep. (With two days left before Christmas, the site now has some of those items in stock.) eToys has lost half its value since Thanksgiving weekend.

eToys is also facing big competition from Amazon.com and

Wal-Mart

(WMT) - Get Report

. Discount department stores like Wal-Mart often use toys as a loss-leader to lure people into the stores. That means they are willing to sell those items near or at cost because they know that once shoppers are in the store, they're likely to buy other items with higher profit margins. That hurts the companies focusing on one area.

Shoppers who drive to a retail store to shop can be sidetracked by other goods on display. In online commerce, it's easier to move on. "It's just one click and you're out of the store," says Curt Rohrman, fund manager of the

(USSCX) - Get Report

USAA Science & Technology fund and the

(UFSGX)

USAA First Start Growth fund. He sold out of eToys between Oct. 13 and Nov. 24.

Holiday sales numbers and fourth-quarter financial results won't start coming out until next month. And after this quarter investors may have to wait till turkey time 2000 for another surge in sales. If they aren't being swayed into these Internet retailers during one of the busiest times of year, it's likely that these stocks will keep sinking in the coming months without much to feel jolly about. Not even reports Friday of strong

traffic to top e-commerce sites had much effect on these stocks. After all, traffic doesn't always translate into dollars.

The sterling example is Amazon, which investors seem to believe will remain a leader in electronic commerce. Despite concerns about whether the company will ever make money or stabilize margins, Amazon's stock could stay resilient in coming quarters because book and music sales are relatively stable throughout the year.

"Amazon has led the way for dot-com retailing," says one money manager for high-net-worth individuals who holds shares. And should Amazon follow

Rudolph

and go down in history, it's increasingly uncertain whether other online retailers will follow.