Internet 2001: Bleak Outlook For E-tailers

Initially I intended to cover the Internet Services sector in today’s Morning Report. However, given that Christmas is coming on Monday, I thought it would be more appropriate to discuss the outlook for the E-tailer sector in 2001.

Appropriate and convenient, since many of you are pressed for time today, and a survey of prominent and promising e-tailers won’t take long.

That’s because no other Internet sector saw more casualties this year than the E-tailers. Pets.com, MotherNature.com, Streamline.com, Garden.com – those and many others bumped into the hard reality of commerce, with or without the “e”: You’ve got to make a profit, or eventually you’ll run out of money. (And
eyeballs, or traffic to your site, aren’t a substitute for revenue.)

This grim scenario should get even worse in 2001. Expect even more e-tailer flameouts and failures. The vast majority of e-tailers are low on cash, market cap, share price and time.

The only e-tailer that is a clear success is eBay , and the online auction market giant isn’t even an e-tailer, per se. It’s a provider of B2C (business-to-consumer) and C2C (consumer-to-consumer) services.

With more than 70% of the market share for online auctions, eBay has catapulted into a position of almost unassailable dominance. It will be extremely difficult for any other auction sites to pry away eBay users. After all, why would either buyers or sellers want to use a smaller online auction service? There’s no motivation to switch.

Financially, eBay is sound, with several quarters of increasing profitability and trailing 12 months’ revenue of $370 million. Based on its current market capitalization of $7.6 billion, eBay is valued at 20.6x TTM revenue. That’s the cheapest EBAY has ever been, thanks to a 77% drop in share price since peaking at $121.88 on March 24.

Of course, if the market continues to head south, EBAY could get even cheaper. But in light of the company’s dominance of the growing online auction business, I think now is a good entry point.

As for the largest (by far) pure e-tailer, Amazon.com , I’m simply not convinced that the company will ever be profitable, so I don’t view it as a good investment.

Most of the smaller fish will disappear as they go broke or are devoured by larger companies. One exception should be Cheap Tickets , a seller of discount air fare that still derives most of its revenue from call centers rather than the ‘Net.

Note: The Morning Report will take Christmas Day off, but will be back on Tuesday. I hope you all enjoy your holiday season.