RealTime IT News

Christmas Coming Late for eToys Shareholders

By all indications, it is the most popular site specifically selling the most popular product category during this year's record online shopping season. Yet shares of eToys.com (ETYS) continue to fall.

In trading Thursday, ETYS dipped below $40 per share for the first time since mid-August, back when eToys stockholders were eagerly awaiting a fall run-up. (a href="http://www.internetstockreport.com/tracker/article/0,1785,184321,00.html">eToys Ready For Holiday Rush)

They got that run-up. In fact, they got two. The trouble is, neither has lasted. The stock closed a high as 84-1/4 on Oct. 11 before beginning a slide accelerated by warnings in late October that the company would be spending more on marketing this quarter.

After kicking around in the low 50s for the first half of November, ETYS took off again, peaking at 66 5/8 on Nov. 26. Since then it has been down 37 percent.

No amount of positive news seems to shake eToys' stock out of its slump. On Monday Goldman Sachs raised its rating of eToys to "buy" from "market outperformer." ETYS rose less than 2 percent that day.

And late Tuesday an analyst at Thomas Weisel Partners said eToys could exceed $105 million in sales this quarter, smashing his previous estimate of $83 million. On Wednesday shares dutifully fell almost 10 percent.

It's clear that investors continue to focus excessively (or obsessively) on the downside of extra competition for eToys this shopping season from Amazon.com (AMZN), toysrus.com and others: lower market share and increased spending on marketing and sales. Both are legitimate concerns.

But I believe investors would do better to look instead at eToys strong position in the market. It leads all other toy-exclusive sites this season in traffic and unique buyers. The only question is whether Amazon.com is selling more toys, and we won't know the answer to that until the e-tail leader's quarterly report next month.

Whatever Amazon.com's toy sales, they won't matter if eToys shows strong revenue growth. Last year it shook the e-commerce world by racking up $22.9 million in sales for the quarter ended Dec. 31. If it merely meets the $83 million revenue estimate this quarter, it would realize a 262% gain. If sales for the quarter reach $105 million, that would be a 359% increase over last year's holiday quarter.

Investors can ignore site traffic reports, but ultimately they won't overlook strong sales growth. eToys reports quarterly results in late January. If the company exceeds expectations, the current price for ETYS will look like a bargain.

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