For more than a year, shares of e-tailers have had a premium that valued their growth prospects above actual earnings.
In recent months, however, investors in high-flying Net merchants such as Amazon.com and Value America have begun to grapple with some traditional issues such as inventory, seasonal sales and layoffs. Most recently, they have been spooked by an ancient concern: that the Federal Reserve will raise interest rates, dampening consumer spending.
As the "Internet multiple" has been replaced by traditional metrics, e-tailers' shares have been pounded.
"Investors don't seem to care that these stocks are Internet stocks as much as they used to," Keenan Vision financial analyst Vern Keenan said. "Investors are more interested in a course toward profitability, good management execution, good inventory and balance sheet management, and not the promise of being able to take over the world by being on the Internet."
This new focus on fundamentals has meant bad news almost across the board. (See related chart.) Shares in several e-tailers have declined sharply since Dec. 1:
E-commerce bellwether Amazon is down more than 27 percent.
Barnesandnoble.com has sunk 34 percent.
eToys has plunged a whopping 73 percent.
Value America is down 59 percent.
Ironically, the sell-off comes on the heels of a record holiday shopping season online. In fact, most companies have seen their stocks fall despite rapid fourth-quarter revenue growth that met or beat analysts' expectations.
But revenue growth has lost its cachet, as analysts and investors tell online merchants to "show me the money."
Amazon, for example, has been able to boost its sales each quarter, but some analysts wonder whether those sales are sustainable. If the company has to continually spend millions on advertising and marketing to keep sales climbing, it may never be profitable, they say.
James Schrager, a professor at the University of Chicago's business school, is among the most blunt at summarizing the e-tailers' outlook. "Amazon's model doesn't work, the same with most e-commerce companies," Schrager said. "Amazon has discovered that the more they sell, the more they lose. All the numbers are going backwards."
Adding to concerns is the prospect of increased competition, which has driven costs up and profits down for brick-and-mortar retailers.
Despite fierce competition, these old-world retailers have been able to survive and thrive because of a key factor that online rivals don't enjoy: geographic location.
From Safeway to Sears, retailers derive a good portion of sales based on their proximity to customers. In the online world, every potential customer is a mouse-click away from scores of competing companies.
"I think that people systematically underestimated the amount of competition that entered the race," said Unterberg Towbin analyst Dan Ries. "There will be very few winners, but those winners will be tremendous companies."
But even if Amazon and others turn out to be winners and post big profits, Schrager says that unlike other Internet sectors, Net retailers are not revolutionizing the retail world. Indeed, most of the big changes have already taken place.
"There's no exciting news coming out of these companies," Keenan said. "Pretty much everything that needs to be said has already been said."
Not everyone is convinced, however. Some analysts point to the projected growth of both e-commerce in general and of individual companies' revenues when arguing that dot-com retailers deserve their sky-high valuations.
Also, despite their investments in distribution centers, call centers and inventory, pure-play e-tailers don't have the overhead of physical stores or the staff to run them. That should make them more efficient than traditional retailers and allow them to expand much more rapidly, these analysts say.
"There is definitely a difference between the e-commerce companies and the offline retailers," ING Barings financial analyst Tim Fogarty said. "When the model comes to fruition, it will prove out."
But that could take awhile. Analysts expect few e-tailers to be profitable this year, or even next year. Meanwhile, investors have begun to move their money into other sectors where the returns are expected to be higher, such as business-to-business e-commerce.
News.com's Scott Ard contributed to this report.
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