Pets.com: The Dog Still Has Fleas

This year, the IPO market has been torrid. Yet, there have been some
stinkers. One has been Pets.com . Basically, investors have abandoned this one. In the IPO, the stock
was offered at $11. Now, the stock is trading at a lowly 7-1/32.

But yesterday, the company found some shelter. Analysts from Merrill Lynch and Thomas Weisel initiated coverage of the stock, giving out “buy” recommendations. Then again, both firms were underwriters of the Pets.com IPO. On the news, the price of Pets.com (IPET)
was up only 29/32.

Of course, the e-tailing market is under extreme pressure. There is much
concern that these companies will never make money – especially as
brick-and-mortar giants enter the fry. Instead, investors would rather put
their cash in more exotic areas, such as business-to-business,
infrastructure and even biotech companies.

It is undeniable that the pet market is massive. In the US, it is about $23
billion per year. What’s more, people love their pets and, as a result, are
willing to spend money on them.

So far, Pets.com has been gaining lots of momentum. In fact, Amazon.com is a strategic investor in the company.

But is Pets.com being unnecessarily punished? Is it an opportunity at
current valuations? I don’t think so.

The pet marketplace is not ideal for e-commerce. For example, the biggest selling category for Pets.com is pet food. Unfortunately, the cost of shipping pet food is expensive and a drag on margins. Although, Pets.com has begun selling private-label food, which sells at higher margins.

But I think the biggest problem with Pets.com is the widespread
competition. Pets.com faces such formidable opponents as Petopia.com,
PetsMart.com, and PetStore.com. There is also indirect competition. For
example, when Wal-Mart’s online operations are in full-swing, pet supplies
will be a major category.

Competing in this crowded marketplace requires huge sums of marketing
dollars. In fact, Pets.com has undergone a major advertising campaign,
involving expensive commercials. However, it is unclear whether “.com”
commercials make any sense.

No doubt, Pets.com has a great site. It has strong backers. It has a
potentially big market. Unfortunately, it will likely take several years for the company to make any money – and this may be too long for investors to wait.

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Can Pets.com become the online market leader in this niche? Billy B wrote: “Is Pets.com the only one with fleas? What about the underwriters?” Discuss it here

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