Buy.com Tries to Sell IPO

It bills itself as the company that will knock Amazon.com (AMZN)
off the top of the Internet e-tail food chain.


A brash claim, but you’ve got to be impressed with Buy.com’s growth in
the past year. With third-quarter revenues of $160 million, up 357% from
Q3 ’98, the company generates more online sales than Egghead.com (EGGS),
CDnow (CDNW)Cdnow,
barnesandnoble.com (BNBN)barnesandnoble.com
– indeed, every other pure e-tailer except Amazon.com ($356 million).

Now Buy.com is ready to launch the next stage of its challenge. The
company last week filed with the Securities and Exchange Commission for
an initial public offering of $150 million. (No share amounts were
specified in the S-1 filing.) Lead underwriter is Merrill Lynch; Buy.com
plans to trade under the Nasdaq ticker symbol BUYC.

Founded in 1997, Buy.com claims to carry 850,000 products, though the
majority of its sales come from computer hardware and software.

Still, sales are sales, and Buy.com makes plenty to new and repeat
customers both. The company reports that repeat customers comprised 48%
of online orders in September, and more than 55% of revenues.

But in order to grow revenues fast enough to go mano a mano against
Amazon, Buy.com has been selling many items below cost. In the nine
months ended Sept. 30, Buy.com had a negative gross margin of 0.9%, down
from 4.1% in the same period last year.

The company said it is improving gross margins, and for the last two
quarters that’s true. The Q2 gross margin was -3.3%, while last
quarter’s had improved to 0.5%. (Break out the champagne!)

However, in its S-1 filing, Buy.com warns investors that “our ability to
become and remain profitable depends upon our ability to substantially
increase our net sales. We cannot be certain that our sales growth will
continue or that we will ever become profitable.”

A warning to heed, especially coming from a company with a $80.5 million
net loss through the first three quarters of 1999, including $33 million
in Q3 alone. Add in 1998’s net loss of $17.8 million, and Buy.com is
nearly $100 million in the hole.

That’s some hole. And you need better than a 0.5 percent gross margin to climb
out of it.


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