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 (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
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 (AMZN), 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 is selling more toys, and we won’t know the answer to that
until the e-tail leader’s quarterly report next month.

Whatever’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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