Stellar IPO prices fall despite e-commerce boom

And it's not just the obscure players that are drowning below their public offering prices. Online grocer and venture capital darling Webvan's shares are trading below the company's IPO price; and as of Tuesday, so were those of leading toy e-tailer eToys.

The shares are dropping at a time when the holiday euphoria surrounding e-commerce seems to be wearing off. This down market has sent e-commerce bellwether Amazon.com down 39 percent from its 52-week high set last month. Meanwhile, eBay, which saw gains after posting a 4 cents per-share profit Tuesday, is still down 29 percent from its 52-week high, set last April.

Market observers blame the slide in e-commerce stocks on a number of factors, including investors focusing more on profits and becoming jittery over fears that the Federal Reserve will raise interest rates. Many investors also have begun to move their investments into business-to-business e-commerce and other, seemingly hotter, Internet sectors.

"Investors have a very short attention span in the Internet market," said David Menlow, president of IPOfinancial.com. "There are just so many of these stocks in the marketplace, and investors are playing an internal Internet rotation game."

Although the companies influenced might not see it that way, the depression in e-commerce stocks is a positive development, Menlow and other analysts say. The flood of e-commerce ads this holiday season was a result of what financial analyst Dan Ries calls the "undisciplined money" that was poured into e-commerce through venture capital investments and public offerings last year.

With seemingly every company spending several million on marketing, few companies' messages rose above the noise, said Ries, of Unterberg Towbin. Now many of those companies are out of cash without having built a business. As investment money dries up, those companies will have to focus on the fundamentals, he said.

"Last year was about revenue and growth," Ries said. "It doesn't look like the companies that followed that strategy at any cost will be rewarded by the market with a high share price."

The sinking share prices could also have a negative effect on employee morale. Many high-tech workers trade bigger salaries at old-line firms for stock options at start-ups in the hopes that they will strike Internet gold. But as a company's stock price drops, so does an employee's compensation.

"Clearly it is (important)," said Dan Rabinowitz, senior vice president and chief financial officer at Peapod. "There are certain employees with a short-term focus, and we have a more difficult time retaining them."

The downturn may also lead to consolidation in the industry, as companies that aren't able to meet investor expectations end up as acquisition targets or roadkill.

"They are going to end up being carcasses at some point," IPOfinancial.com's Menlow said. "There are going to be many deals that will be perceived to be cheap by opposition companies. It's going to spur them to buy other companies' stock."

That may happen eventually, but in the meantime, many company executives are emphasizing the importance and challenges of building a business.

The decline in eToys' shares from its October high of $84.25 to less than $17 today has contributed to SmarterKids.com's decline, said David Blohm, president and chief executive of the Needham, Mass.-based SmarterKids.com. That's why Blohm has begun to draw distinctions between his company and eToys, emphasizing that SmarterKids.com sells children's educational products, rather than just toys.

"There are certain things I can control, like how we handle our customers and our message," Blohm said. "My expectation is that over time, the stock price will take care of itself."

Meanwhile, Ashford.com CFO David Gow said that having a current stock price below its IPO level has actually been a boon to the Houston-based company.

"It makes it easier to recruit people because we can offer them options at a lower price," Gow said.