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THE CUTTING EDGE | Investor's Edge

Shopping for Bargains Among Electronic-Commerce Stocks


Today Cutting Edge introduces a biweekly column, Investor's Edge, by Times staff writer Edward Silver. It will spotlight trends and strategies in the technology stock market.


Investors who aren't eager to chase the high-priced, high-profile electronic-commerce stocks don't have to give up on this promising new industry. They can just take their cue from the bargain hunters who rummage the real-world malls and shop around.

Yes, there is an e-commerce business beyond, EBay and E-Trade Group. Stocks that offer better value may have been overlooked, or, like Preview Travel and, might be positioned to take advantage of the next phase of the Internet's constant reinvention. Companies like BroadVision that sell tools to build effective online shops can also look forward to blossoming demand.

But February was a lukewarm month for this recently hot group, and there are good reasons to expect profit-taking to persist.

Last week's leap in interest rates is a negative for the market as a whole. Among Internet stocks, supply is increasing to meet demand, as a slew of initial and secondary offerings hit the market and limits on insider sales expire for some of last year's IPOs. The holiday shopping season that pumped up online retailers has come and gone, and this quarter's results may be underwhelming by comparison, many analysts say.

Scariest of all, the e-commerce firms may be obliged to start proving that they can turn eyeballs into earnings. But in many cases, expectations of profits are being put on hold as e-tailers wage price wars and plow their resources into building their brands.

The cost of competing is one reason analyst Lauren Cooks Levitan of BancBoston Robertson Stephens sees a shakeout coming.

"I don't think we will end up with 50 pure-play e-commerce companies," she said. "We will have a handful of franchises, and the balance will be hybrid traditional retailers and catalog companies that have well-developed Web presences."

Levitan expects the languishing stock of San Francisco-based Preview Travel (ticker: PTVL), the only publicly traded Internet travel service, to eventually take off. The travel industry is ripe for change, she says, as more vacationers embrace the Web's round-the-clock convenience.

Currently, the industry suffers from a poor "look-to-book" ratio: Surfers like to do research at travel sites but usually buy tickets offline. Preview's detractors also point to competition from Microsoft's Expedia, Sabre Group's Travelocity and the airlines' own Web sites. The departure of Preview's chief executive, Ken Orton, two weeks ago didn't help the stock, either.

But the bullish Levitan said Preview's recent make-over has made its site more attractive and easier to use. The high-margin advertising component of Preview's business is growing fast, she said, adding that its marketing alliance with America Online, high traffic and relatively low valuation--about $276 million--make it an inviting target for an offline firm eyeing the huge potential of online travel.

Like Preview, (BYND) is waiting for its market to gel. Some analysts see the firm dominating online software retailing, a business that could thrive when the coming bandwidth boom shrinks the time it takes to download programs.

"Among the Web software retailers, Beyond is the one to own, but we have to keep our eye on Amazon. The hope is that they can build their brand between now and Amazon's entry," said Paul Cook, lead manager of the Munder NetNet fund, an Internet portfolio that returned 97% in 1998. Last week, Beyond announced that it would acquire rival, giving it the bulk to shoot for category-killer status.

Beyond, based in Sunnyvale, Calif., missed analysts' estimates for the quarter ended in December, losing 53 cents a share as marketing costs spiked. But the scale of the market ahead is what fans find compelling.

Researcher Jupiter Communications forecasts that 35% of software sales will be made online in 2002, as opposed to 11% of book sales. "It's the ultimate captive audience, since every customer on the Web has a computer," said e-commerce analyst Stephen Franco of Piper Jaffray.

Banking on the theme of offline-online hybrids, NetNet's Cook has been adding names like Gap (GPS) and Office Depot (ODP) to his fund. Both are successfully adapting their proven brands to the Web, he says. And he likes the fact that they are the first big players in wide-open fields--"there's no Amazon in their space."

Indeed, offline retailers are getting gung-ho about the Web, and they have the budgets, if not always the vision, to invest in state-of-the-art sites. For sellers of e-commerce tools, the trend means multiplying revenue streams. Such "enabler" firms have no need to market to the masses, and some actually post earnings.

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