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| Holiday shopping: Investors have bid up shares of leading e-tailers during the past month on the hopes of strong 4Q sales. |
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| More about online commerce
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NEW YORK (CNNMoney.com) – It's that most wonderful time of the year...time to go bargain hunting online for presents! So here's our musical tribute to that new 21st Century tradition, Cyber Monday.
Jingle bells. Jingle bells. Jingle all the way. Oh what fun it is to shop in your PJs on eBay. Jingle bells. Jingle bells. Jingle all the way. Oh what fun it is to shop in your PJs on eBay. Dashing through the Web, no trolling the mall all day. Click on Amazon, laughing all the way (ha ha ha!) Cheap stuff on Overstock, making spirits bright. What fun it is to stay at home and buy on the Net tonight.
Consumers are singing the praises of e-commerce companies as they gear up to buy their holiday gifts. According to Web tracking firm Nielsen//NetRatings, traffic to online shopping sites on Black Friday was up 29 percent from a year ago, with eBay, Amazon.com and Overstock.com ranking as the first, second and sixth most visited sites.
But investors seemed to be already anticipating a holly jolly Christmas however. Shares of Overstock.com (Research) are up 12 percent during the past month while Amazon.com (Research) and eBay (Research) have both popped more than 20 percent.
They're not the only companies benefiting from some early yuletide cheer, either. Shares of specialty gift site RedEnvelope (Research) are up 17 percent while online jewelry retailer Blue Nile's (Research) stock is up nearly 23 percent. Provide Commerce (Research), an online flower and gift basket seller, has gained about 27 percent in the past month.
This phenomenon is nothing new. For the past few years, online commerce companies have tended to rally sharply in the fourth quarter as investors begin to realize that more and more people are buying gifts on the Web. Shocking, isn't it?
Sales better than expected but already priced in?
This year though, investors appear to have another reason to reward online retailers. It looks like the holiday shopping season is going to be stronger than many believed it would be just a few months ago, when high energy prices led to fears of a consumer clampdown.
The fact that consumers are still willing to spend is obviously good news but it may already be reflected in the stock prices of companies like Amazon.com, eBay and Overstock.com.
"A lot of enthusiasm is baked into the stocks and part of that is a reaction to thoughts in the summer that holiday would be truly horrible. It looks like now that it should at least be on par with last year," said Rebecca Kujawa, an analyst with Stanford Group. "But many online commerce stocks are richly valued and we'd be cautious."
Provide Commerce and Amazon.com each trade at about 30 times 2006 earnings estimates while Blue Nile and eBay both sport multiples of more than 40 times next year's profit projections.
Then there's Red Envelope and Overstock.com. Neither of these companies is expected to be profitable in fiscal 2006. Red Envelope trades at about 37 times earnings estimates for its 2007 fiscal year.
Nonetheless, Kujawa said that all of these companies have expected growth rates that are much higher than other retailers and she doubts that any of the stocks will lose momentum this year. Her concerns are more about what happens after the stocks report results for this quarter in January.
If it looks like a retailer...
As such, some online retailers have experienced some post-holiday blues in the past. Craig Bibb, an analyst with W.R. Hambrecht, said that Red Envelope's profit margins took a big hit earlier this year because the company was forced to drastically lower the prices on products that weren't sold during the 2004 holiday season.
And while big discounts in January and February may be good news for consumers, they are not for investors in e-commerce stocks, especially since sales in the December quarter accounts for a large proportion of overall annual revenue for most of these companies.
"The risk for online retailers is they have to buy well in front of the holidays, guess what demand is going to be and if they guess wrong, it makes it difficult to blow out excess inventory without markdowns," Bibb said.
Bibb added, however, that there might still be some opportunities in online commerce stocks. He said Provide Commerce could report stronger than expected profits early next year if fuel prices continue to come down. The company took a hit earlier this year due to high fuel surcharges passed along by FedEx (Research), its primary shipping carrier.
But at the end of the day, even though online retailers are growing more rapidly than most of their "brick and mortar" counterparts, these companies are still retailers.
That means they face a lot of tough competition from the likes of traditional retailers like Wal-Mart (Research), Target (Research) and Best Buy (Research). And the companies are also not as profitable as other high-growth Internet companies like Yahoo! (Research) and Google (Research). So they might not deserve premiums as frothy as other online services companies.
"Valuations in general for e-commerce companies have been historically higher than we've been comfortable with and they have low operating margins," said Ryan Jacob, manager of the Jacob Internet fund. "So it's an area we've shied away from."
For more about Cyber Monday, click here.
For a look at our holiday shopping special, click here.
Jacob's fund owns a small position in eBay. W.R. Hambrecht has done investment banking for Overstock.com but Bibb does not own shares of the companies mentioned in this story. Kujawa does not own positions in any of the stocks mentioned in this piece and her firm has no banking relationships with them.
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