Ready to Bid? uBid Hopes So as It Rolls Out Secondary Offer

The stock's fallen sharply since its first day of trading, but the company keeps returning to the well.
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Eight months ago,

uBid

(UBID)

showed all the signs of a Net success story.

The Elk Grove Village, Ill., company was riding the wave of investor fascination with online auctions. Its coffers flush with nearly $24 million in cash from an initial public offering, uBid was set to revolutionize retailing by allowing customers to set their own prices for computers and electronics.

Investors saw their dreams of easy money realized when uBid's stock soared 1,160% following the IPO. So what if uBid's wacky business plan promised huge profits in the future, but failed to outline a logical way of achieving them? Shareholders were willing to overlook that glitch for a chance to play Internet roulette.

Today, investors are chanting the profitability mantra at a time when uBid's losses are accelerating. Undaunted by the current climate, the company has filed to sell an additional 2.3 million shares in a secondary offering. But uBid, along with other online auctioneers, is facing the harsh realities of fierce competition, fickle customers and costs that have spiraled higher than anyone anticipated.

For uBid investors, the lesson hasn't come cheap. Since spiking at 189 after its December IPO, uBid shares have sunk 86%, compared with a 32% rise in

TheStreet.com Internet Sector

index. In the past month, as Net stocks have taken a beating, uBid has fared worse than average, dropping 20%, compared with a 14% dip in the DOT. This week, uBid shares have regained some ground, closing down 3 3/4 Thursday at 23 1/4. (Parent

Creative Computers

(MALL)

sold 20% of the company in the IPO and later spun off the remaining 80%.)

uBid Spikes and Sinks
Stock price of uBid since IPO

What went wrong has more to do with simple economics than grand notions of a new economy. uBid's quarterly filing with the

Securities and Exchange Commission

says it best: "Because minimum opening bid prices for the merchandise listed on our Web site generally are lower than our acquisition costs for the merchandise, we cannot be certain that we will achieve positive gross margins on any given sale."

The company's model, which requires it to buy merchandise from a manufacturer and auction it to a consumer, is inherently less profitable than the format pioneered by

eBay

(EBAY) - Get Report

, which collects a fee from transactions among consumers.

uBid declined to comment for this story, citing the quiet period preceding its stock offering.

Initially, investors were willing to overlook uBid's risky premise for the chance of owning the next

Amazon.com

(AMZN) - Get Report

, says David Hirsch, an associate with venture capital firm,

The Cottonwood Group

. (His firm has no investments in the online auction companies mentioned in this story.)

Instead, "Nobody's established a brand in business-to-consumer auctions," Hirsch says. "What you've got is dilution all around." A

Yahoo!

search of companies holding online computer auctions, which is uBid's core business, turned up 43 listings.

More auctions mean better prices for consumers. The flip side is that uBid and even eBay have seen their revenue per customer decrease. Another online auctioneer,

Onsale

(ONSL)

, said Wednesday that it expected 8% to 12% revenue growth for its current quarter ending Sept. 30. That's anemic for the Internet.

Meanwhile analysts say costs are edging higher as more auction companies chase a finite amount of merchandise; uBid and Onsale serve as clearinghouses for manufactures to unload excess or distressed products, which are typically in limited supply. "You have more companies chasing the same items," Hirsch says. "It will raise the price that auction companies must pay" to acquire these goods.

Auction sites are in a tight spot if they try to raise consumers' minimum bids because their whole premise is based on undercutting retail prices.

And with manufacturers like

Dell

(DELL) - Get Report

launching their own auctions, "what do you need an intermediary for?" wonders Faye Landes, an analyst with

Thomas Weisel Partners

. She rates eBay a hold and doesn't follow the other auction companies. (Her firm hasn't performed underwriting services for eBay.)

There's more bad news.

In order to ensure that they have merchandise to auction, companies are increasingly buying inventory outright, as opposed to on consignment, which relieved them of paying suppliers until a sale was made. Owning the inventory requires paying for the goods in advance, with no guarantee that a sale will ever be forthcoming. That leaves auction sites open to the risk of having to liquidate unsold merchandise below cost, not to mention the extra storage expenses.

Is it any wonder that uBid's losses are expected to widen to $1.85 a share for the year ending in December, from 66 cents a share last year?

Still, there are believers.

"uBid's model represents a meaningful advance over competitors," says Ryan Alexander, vice president of equity research with

Wit Capital

, who rates uBid outperform. How? "By selling a wider range of products." (His firm has an underwriting relationship with uBid.)

uBid now auctions everything from sporting goods to housewares. But so does Onsale, which has taken the extra step of merging with software vendor

Egghead

(EGGS)

and launching a division that sells products at cost. Perhaps more troubling, eBay has dipped its toe into the business-to-consumer market by hosting closeout auctions for certain manufacturers.

One investor who bought shares in uBid's IPO quickly sold them soon after because he knew the stock would pop as so many Net offerings had done before. "uBid was all hype," he says.

If so, then it looks like that hype is going ... going ... gone.