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Buy.com surges in market debut

Larry Dignan
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Larry Dignan
3 min read

Buy.com (Nasdaq: BUYX) gained 12 1/8 to 25 1/8 in its initial public offering Tuesday.

Shares of the online retailer opened at 30 1/8 Tuesday, more than double its offering price. The company offered 14 million shares with Merrill Lynch as the lead underwriter.

Buy.com (profile) runs a network of online stores that peddle everything from computer hardware and software to books, music and video to golf and travel.

Analysts, however, aren't rating Buy.com an IPO hit. Some analysts and industry watchers have said they expect Buy.com to fall in the aftermarket because of negative profit margins and a customer base that may not stick around if the company raises prices.

Nevertheless, Buy.com has become one of the largest e-commerce sites on the Web in terms of revenue and users despite competing with e-tailing players such as Amazon.com (Nasdaq: AMZN), Egghead.com (Nasdaq: EGGS) among others.

The company has 1.9 million customers, 4.7 unique visitors a month and stellar sales growth. For the three months ending Dec. 31, Buy.com had sales of $200.6 million. For 1999, Buy.com reported pro forma sales of $597.8 million.

Buy.com's profit margins, however, are dreadful. For the last three months of the year, margins improved to a negative 0.9 percent from a negative 1.4 percent for the same period in 1998. For 1999, the company lost $145.8 million.

"They have a strong brand," says Randall Roth, an analyst with Renaissance Capital. "But the margins are either going to be their genius or their downfall."

In regulatory filings, Buy.com said it will try to boost margins with advertising revenue. But Buy.com only received about 2 percent of its sales from advertising, the company said. To improve margins, the company said it has moved to raise prices on certain goods, but offers no guarantees for overall advances in this area.

According to regulatory filings, here are some risks to ponder with Buy.com:

  • Margins: For the year ending Dec. 31, Buy.com reported revenue of $596.8 million, but the cost of goods sold was $603.7 million.

  • Dilution: Following the company's 180 day lock-up period, a whopping 93,233,047 shares will be eligible for sale. That's a lot of shares poised to hit the market all at once. Look for Buy.com to become Sell.com. Buy.com will also have 129,140,175 shares outstanding after the offering.

  • Chief executive officer turnover: In the fall of 1999, Scott A. Blum, founder and CEO, resigned and deposited all of his shares in a voting trust. Blum has nothing to do with Buy.com's day-to-day operations but owns 54 percent of the company as of Dec. 31.

  • Gregory J. Hawkins, 45, is currently CEO. Hawkins has been CEO since March 1999 and became chairman in September. Hawkins used to work for Ingram Micro (NYSE: IM), one of Buy.com's largest distributors.

  • Control issues: Softbank, the Internet incubator that owns a big chunk in ZDNet, controls more than 29 percent of Buy.com. And based on stipulations in Blum's exit, it effectively controls nearly 80 percent of the voting shares. Blum's voting trust has to mirror votes of other directors.

    Softbank will "effectively control the votes of approximately 77.8 percent of our common stock on significant corporate actions and 29.7 percent on routine corporate governance matters immediately after this offering," the company said.