IBuyDigital.com files for IPO and 5 reasons why YouMightNotBuyThis.com

Online consumer electronics retailer iBuyDigital.com just filed an S-1; underwriters are Merriman Curhan Ford & Co. and Oppenheimer and Co. The proposed ticker is IBUY. Here's a quick overview of the filing, five reasons why you should be careful of this IPO, and implications for other stocks including ECST, OSTK, SHOP, YHOO and GOOG.

IBuyDigital runs multiple etail Web sites: IBuyDigital.com, IBuyplasma.com, DBuys.com, DigitalMegastore.com, CentralDigital.com and realdealshop.com. It fulfils orders for these sites from a central distribution facility located in Brooklyn, New York. These sites sell electronics products to consumers (no business to business sales here). The company reported revenue of $44.7 million in the first nine months of 2004, versus $42.7 million for same period in 2003. And remember - the biggest quarter for consumer electronics sales is Q4, which isn't in these numbers.

Why would you buy IBUY stock?

Well, it seems like a great play on growing demand for consumer electronics. The digitization of music, TV, and broadcasting and the transition to digital cameras and flat panel TVs means that sales of consumer electronics are growing fast. In fact, consumer technology is arguably a more attractive sector for investment than enterprise technology.

But here are 5 reasons to be wary of the IBUY IPO:

1. Lack of competitive differentiation. The S-1 states that IBUY's value proposition to consumers is "Ready Access to Products...Value Pricing...Well-Established and Trusted Source for Products... Positive Customer Experience...". Doesn't sound very differerentiated from every other etail business.

2. Highly seasonal business. According to the S-1, "Net sales in the fourth quarter of 2001, 2002 and 2003 were 48%, 33% and 30% of our total net sales for each of such years".

3. Dependence on comparison shopping engines. The S-1 states: "We depend on shopping comparison websites to attract a substantial portion of the individuals who visit our websites. Losing access to these sites, or being prevented from presenting more than one of our websites on these sites, could significantly decrease the number of individuals who visit our websites and purchase products from us, which could lead to a decline in revenues and profitability." Now bear in mind that Shopping.com and Bizrate just hiked their fees to merchants.

4. Family business. The CEO is Elliot Antebi. The VP Fulfilment is Barry Antebi. The Chairman of the Board is Mark Antebi. Mark Antebi is the father of Elliot Antebi, and Barry Antebi is the first cousin of Elliot Antebi and nephew of Mark Antebi. Now look at this little gem: "We entered into a one-year consulting agreement with Mr. Antebi, our chairman of the board, on December 14, 2004, under which Mr. Antebi provides consulting services as reasonably requested by us from time to time. Under the terms of the consulting agreement, Mr. Antebi will receive $85,000 as compensation for rendering such services, payable in equal monthly installments." Now that's what I call an independent Chairman of the Board.

5. Is the business really growing? Revenues actually fell slightly between 2002 and 2003. Numbers from the S-1: 2003 revenues were $61.2 million versus $61.4 million in 2002 and $30.1 million in 2001.

Implications for other stocks:

  • More competition for Overstock, eCost and Amazon. Why should IBUY go public, other than to allow three family members to "diversify their assets", to use a favorite Wall Street euphamism? Because an IPO will generate publicity (=advertising) for IBuyDigital.com and its other Web sites, and because the capital infusion will allow it to increase its advertising budget.
  • The ultimate beneficiaries of etail IPOs are the comparison shopping and general search engines. IBUY will likely spend its boosted advertising budget on pay-per-click ads provided by the comparison shopping engines. Why? IBUY will have to show revenue and customer growth to maintain its post-IPO valuation, and most of its customers come from comparison shopping engines (Shopping.com, Yahoo! Shopping, Shopzilla and Froogle). That probably won't change, because comparison shopping engines have higher conversion rates than general search engines and offer higher return on investment at current ad prices.

Here's the key point:

I've argued that the Internet results in greater price transparency, particularly with the advent of comparison shopping engines. That increases price competition, reduces brand loyalty and compresses retailers' margins. Profits will ultimately flow to the search and comparison shopping companies rather than the etailers.

How can you monitor whether this is in fact correct? With two litmus tests:

Test 1: the rate of repeat customers.
If etailers report rising rates of repeat customers who go direct to their Web sites instead of starting their shopping with a search or price comparison, then they'll avoid rising PPC ad prices and demonstrate the value of their brands. IBUY's S-1 argues that this is the case:

"We believe that we benefit, and over time will benefit to an even greater degree, from customers who are repeat buyers from us because they are more likely to access our websites directly or place orders by telephone, allowing us to avoid incurring click-through referral fees."

But now look at IBUY's repeat customer rates:

2002: 5.0%
2003: 5.6%
2004: 5.4%

Given the lack of revenue growth between 2002 and 2003, the minor rise in repeat customers suggests that IBUY isn't generating brand loyalty. If revenues were actually down slightly in 2003, why didn't the rate of repeat customers rise?

Test 2: profit margins. If I'm right that comparison shopping will result in intense price competition and lack of brand loyalty, we'll see that in the etailers profit margins. Gross profit margins will be weak, and spending on marketing will be high (all those PPC ads). IBUY's gross profit margins for the first nine months of 2004 were 10.5%, and it spent 8.4% of revenue on SG&A. Not a good sign.

You can find the full IBUY S-1 here.

Full disclosure: at the time of writing I'm long SHOP.

Posted by David Jackson on January 14, 2005 at 10:00 AM in ticker: ECST, ticker: GOOG, ticker: IBUY, ticker: OSTK, ticker: SHOP, ticker: YHOO | Permalink | Comments (1) | TrackBack

eCost-co?

Online retailer eCost announces this morning that it's launching a new membership club, Bargain Countdown Platinum, for $30 per year. Here's what you'll get: exclusive access to member-only products and pricing, a best-price guarantee, priority telephone support, and 10% off travel booked through eCost. Of note:

  • Sounds like a similar program offered by Overstock, which itself sounds like club memberships from Costco and Sam's Club...
  • Trend: online retailers try to lock-in customers with loyalty programs. Comparison shopping engine Shopping.com now offers extra discounts if you register for free.
  • Both eCost and Overstock are pushing their travel offerings. (Travel requires no physical inventory and shipping, so it's profitable and highly cash-flow generative.) Does online travel have lower barriers to entry than people realize? If so, not good for Expedia, Travelocity, Travelzoo, Priceline.

Full disclosure: At the time of writing I'm long SHOP.

Posted by David Jackson on December 30, 2004 at 09:19 AM in ticker: ECST, ticker: IACI, ticker: OSTK, ticker: PCLN, ticker: SHOP, ticker: TZOO | Permalink | Comments (0) | TrackBack

Were holiday online sales THAT good?

E-commerce stocks are up sharply today on the comScore prediction that holiday online sales will grow 28% year over year. Earlier, comScore and others were predicting online sales growth of 22-25%. So the stocks are moving:

  • Amazon up over 8%
  • Bluefly up 11%
  • Drugstore.com up 4%
  • Ecost up 9%
  • Overstock up 2%
  • Shopping.com up 6%

Yahoo!, eBay and Blue Nile aren't participating in this rally. But I wonder whether three percentage points of upside to the aggregate growth number (28% from 25%) is enough to justify the moves in the pure-play e-commerce stocks. After all, 28% growth is still below last year's growth rate of 30%, and offline retailers like Wal-Mart are taking market share online.

Full disclosure: at the time of writing I'm long SHOP.

Posted by David Jackson on December 27, 2004 at 01:40 PM in Sector, ticker: AMZN, ticker: BFLY, ticker: DSCM, ticker: EBAY, ticker: ECST, ticker: NILE, ticker: OSTK, ticker: SHOP, ticker: YHOO | Permalink | Comments (0) | TrackBack

Three lessons from the Google Zeitgeist

Google's press center just published its Zeitgeist 2004, a summary of the most popular searches in 2004. This is important reading, despite the fact that's it's backward-looking. Here are three key points from the Google data:

1. Entertainment is tops. Six of the top ten Google searches in 2004 were entertainment-related. This confirms other data that suggest that entertainment (particularly movies) is probably the top non-porn interest category on the Internet. This is good for publishers of movie-related content Web sites, including The Internet Movie Data Base (owned by Amazon.com), Movies.com (owned by Disney), and Hollywood.com (owned by Hollywood Media). Perhaps it also implies that the two Web sites that provide online purchasing of movie tickets -  Fandango (privately owned, gearing up for an IPO in 2005) and Movietickets.com (26% owned by Hollywood Media) - will continue to increase their penetration of the movie ticket market. It also explains why the search engines are beginning to offer specialized search for movie-related information. Look at MSN Search, for example, and you'll see that one of the seven topics for category-specific search in the drop-down menu next to the search box is for movies.

2. Search is entrenched as the on-ramp to the Web. According to Google, the top five brand name searches were all for companies whose URL was exactly the same as the search term used. The top five brand searches were for: "ebay", "walmart", "mapquest", "amazon", and "home depot". What's remarkable about these searches is that every one of them is for a Web site with exactly the URL used in the search - www.search-term.com. What does this show? That many people use search engines as an easy way to return to sites they have used before, even when they know the URL. (Seeking Alpha often gets hits from Google by people searching for SeekingAlpha.com, for example, and I'm sure that will be true for The Internet Stock Blog.) This is strongly positive for the search engine companies. It shows that they have entrenched themselves with users, even for non-search uses.

3. Here come the offline retailers. According to Google, "walmart" was the second most popular searched for consumer brand. We already know that offline retailers are gaining significant market share as they move online. What's remarkable, however, is that Wal-Mart has already overtaken Amazon in search popularity. Implication? The entry of the offline retailers will increase competitive pressure on the pure-play online retailers and reduce their growth rates. That can't be good for Amazon, Overstock, eCost, or the other Web retail stocks.

You can read the full Zeitgeist 2004 here.

Full disclosure: at the time of writing I'm long HOLL.

Posted by David Jackson on December 25, 2004 at 11:44 PM in Themes, ticker: AMZN, ticker: ASKJ, ticker: EBAY, ticker: ECST, ticker: GOOG, ticker: HOLL, ticker: LOOK, ticker: OSTK, ticker: YHOO | Permalink | Comments (0) | TrackBack

Is Amazon being hurt by comparison shopping?

Since comparison shopping sites make it easy to find the best prices on a product, they'll drive traffic to the cheapest stores with the best service and reputations. Traffic to the comparison shopping sites is up sharply this year: Nextag reported a 70% increase in year over year traffic, Shopping.com announced that it expects revenues to rise by over 30% this quarter, and traffic to Yahoo! Shopping and Froogle are also strong. So owners of Amazon stock need to know whether Amazon is benefitting or losing from this trend, particularly since comparison shopping is growing in popularity.

The WSJ's recent article on comparison shopping for books (paid subscription required) suggests that Amazon is a net loser from comparison shopping. As well as the broad comparison shopping sites, book-specific comparison shopping sites are also gaining in popularity, including Fetch-Book.info, BookFinder.com, Isbn.nu, Add-All.com and AllBookStores.com. The general and book-specific sites reveal that Amazon is clearly not the cheapest online retailer for books. According to the WSJ, Amazon was more expensive than Buy.com, Overstock and Wal-Mart.com on five new, popular books. The comparison shopping engines generally take shipping costs into consideration, though not other ways of reducing the cost of buying from Amazon.

Amazon has been criticised by sell-side analysts for its declining margins. It looks like comparison shopping will exacerbate this problem. Amazon will be forced to chose. It can use its efficiency and scale to undercut the competition but at the cost of lower margins. Or it can boost its margins, but at the cost of loosing increasing amounts of revenue as comparison shopping becomes more and more popular.

The comparison shopping sites clearly benefit retailers whose business strategy is to sell at lower prices than other retailers. Overstock, for example, advertises that it's cheaper than Amazon "99%" of the time. According to the WSJ, Overstock expects to sell 500,000 books this month, versus 200,000 a year ago.

Full disclosure: at the time of writing I'm long SHOP.

Posted by David Jackson on December 24, 2004 at 01:58 AM in ticker: AMZN, ticker: ECST, ticker: GOOG, ticker: OSTK, ticker: SHOP, ticker: YHOO | Permalink | Comments (0) | TrackBack

Click-fraud & the public Internet companies

Two recent Internet conferences (Majestic's and Jupiter's) highlighted the growing problem of click-fraud. Speakers described how companies are hiring other people to click repeatedly on pay-per-click ads from their competitors. But nobody mentioned that the problem is far more acute with public companies.  In fact, individuals can directly impact the financial results of public companies without it costing them a penny.

Owners of ASKJ, FWHT, GOOG, MAMA, SHOP and YHOO stand to gain, while owners of AMZN, ECST, and OSTK should be worried.

What makes this particularly interesting is that despite its name, click-fraud is not illegal, and there's practically nothing the victims can do to stop it.  Here's how this will play out:

Companies wishing to trash their private competitors can hire another company to repeatedly click on pay-per-click (PPC) ads.  The competitor's advertising expenses rise, but there's no parallel rise in sales and profits.  While this is sleazy, it's not illegal.

But now let's say you own stock in a search engine company - Ask Jeeves (ASKJ), FindWhat (FWHT), Google (GOOG), Mama.com (MAMA), Yahoo (YHOO) or Shopping.com (SHOP).  You can boost the profitability of the company by repeatedly clicking on ads on those companies' home pages, and by encouraging your friends to do the same.  Click-fraud is boosting GOOG's and YHOO's revenues, but individual investors probably play little role in this.  The companies have such large revenue streams that the impact of individuals clicking on ads to boost revenues has little proportionate impact. 

But that's not true of Shopping.com (SHOP).  SHOP is a far smaller company, so a grass-roots campaign by SHOP shareholders to click on ads would have a dramatic impact on its revenues. Given SHOP's extremely high gross margins, the impact on profits - and thus the share price - could also be large.

The problem is even more acute on the short-side.  Say you're short stock of Overstock.com (OSTK).  You can repeatedly click on pay-per-click ads by OSTK and encourage your friends to do the same.  Smart investors will click on ads in the shopping engines. Why? Conversion rates are far higher for comparison shopping engines than general search engines, so the ads cost the advertisers more and yet they'll be less willing to pull the ads given the quality of the leads they generate.

This problem is probably exacerbated by the improving functionality of the shopping engines.  Shopping.com, for example, allows you to view pages showing only the products from a single vendor, in this case Overstock.com. It even allows you to view single categories of products arranged tightly in a grid and ordered highest-price to lowest-price (most expensive ad to cheapest ad?) such as this array of Overstock.com's jewelry. This makes it easy to click on multiple ads in seconds without having to search through entire pages, and even to email a link to pages of Overstock.com PPC ads to your friends (co-conspirators?) to click on.

How will this play out? Eventually click-fraud will hurt the search engines themselves as it will lower the value of pay-per-click ads and thus the amounts their customers are willing to pay. So the search engines will eventually eliminate click fraud using simple filters, such as refusing to bill for multiple clicks from the same IP address within a certain time period. 

But until that happens, retail investors can impact the financial results and stock prices of public companies. The smaller the company, the larger the impact.  Sleazy though it is, that's got to be good news for the small search engine stocks ASKJ, FWHT, MAMA and SHOP and bad news for the small Internet retailers ECST and OSTK.

At the time of writing I own stock in SHOP and I'm short stock in OSTK - it's been painful. Please note that, as with all Seeking Alpha articles, this is not a recommendation to buy or sell any stocks (it says nothing about valuation, for example), and that I could change my positions at any time without further notification.

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Posted by David Jackson on December 15, 2004 at 11:39 AM in Themes, ticker: ASKJ, ticker: ECST, ticker: FWHT, ticker: GOOG, ticker: LOOK, ticker: MAMA, ticker: OSTK, ticker: SHOP | Permalink | Comments (0) | TrackBack