Stocks soar into hazy future
Barry Diller and Paul Allen bet on Net auctions-but does that mean everybody should?
Diller's USA Networks has placed two notable bets on online auctions. In January, USA Networks' majority-owned Ticketmaster Online-CitySearch bought CityAuction, which runs auctions in specific geographic areas. It saw a nice complement to CitySearch network of online city guides.
In November, Diller's Internet Shopping Network, one of the Net's first computer stores, exited that business to concentrate on First Auction, its online auction site.
But even bellwether investors make mistakes. Examined through the jaundiced eye of Wall Street, Net auctions are dicey business propositions.
Only one 
auction site, eBay, makes money, and its person-to-person
model is not widely used. Onsale, the
first Net auction to go public, remains mired in losses and has moved toward an "at-cost" sales model because of the unpredictability of its auction business.
The only other publicly traded Net auction is uBid, a spinoff of PC seller Creative Computers.
Still, so pervasive is the eBay effect on Wall Street that even a hint of online auctioneering has proven auspicious for others. As disparate as they are, gadget retailer Sharper Image, old-line auction house Sotheby's, and Ticketmaster all got boosts to their stock prices, at least temporarily, upon mention of their online auction plans.
As businesses, online auctions differ primarily in terms of who owns the inventory and who ships the goods. Owning inventory carries financing costs; fulfillment requires people and creates headaches.
Therein lies the business beauty of eBay: It never owns goods, and it ships nothing. Instead, the company simply collects listing fees (even if nobody bids on an item) and takes a cut of sales.
Onsale, by contrast, owns almost everything it auctions, although it also sells on consignment. But Onsale's recent financial woes--it missed Wall Street estimates for the fourth quarter--stem not so much from carrying inventory as getting it. As PC prices plummeted at 1998's end, Onsale couldn't find enough surplus merchandise to sell.
"We were wondering if this model would work, and we downgraded the stock in early January," said Kevin Wagner, who follows Onsale for brokerage Adams Harkness. "We were concerned with margin pressure."
Onsale wondered too, and in mid-January it added a new service called AtCost, selling computers at wholesale prices plus a $5-$10 mark-up and purchase processing fees. Tech Data, a major computer distributor, holds the inventory and ships products for Onsale.
"We want to be the Costco of the Internet," CEO Jerry Kaplan has said, denying that Onsale is moving out of the auction business. One appeal of the new at-cost approach: "Onsale is essentially farming out the inventory risk," analyst Wagner said.
Onsale said the change will push profitability back to mid-2000, but Wagner estimates that it won't see a profit until the last quarter of that year. He worries too that AtCost will cannibalize Onsale's auction business and squeeze margins.
The auction model carries another intrinsic burden: The merchant never knows how much a sale will bring, complicating revenue projections.
Still, Wagner said, auctions appeal to people, and that makes their stocks worth considering.
Onsale's Kaplan argues that consumer appeal is the key to rival eBay's high stock valuation. eBay's 2.18 million users aren't merely interested in the company but passionate about it, and Kaplan thinks they have bid the stock higher.
One investment pro agrees: "eBay stock is all held by retail investors, not institutional investors, so to the extent that people still want to own the name, it helps support the valuation," said the analyst, who asked not to be named. His firm has a neutral recommendation on eBay because of the stock's price, which has been hovering around 230.
"The growth required to justify this valuation is astronomical if you ever look at profitability in the future," the analyst said. "eBay is a great company and well run, but it is possible for great companies to have valuations that are above the fundamentals."
eBay faces another challenge: Yahoo has zeroed in on it. Yahoo Auctions, which provides person-to-person auctions like eBay, is charging nothing for its service, relying instead on ad revenues.
Yahoo Auctions, launched in September, is doing just a
fraction of the business that eBay does, running anywhere from 100,000 to 150,000 auctions compared to 1.5 million on eBay last week. People list things because they want to sell them, and they keep returning to eBay. Still, nervousness about Yahoo makes eBay's reported talks to expand its
relationship with America Online and its 16 million members seem sensible.
uBid is so far staying the course as a merchant auction, and its $24 million in fourth-quarter revenue blew away analyst estimates. In the post-Christmas e-commerce euphoria on Wall Street, uBid traded as high as 189. Last week it closed at 54.25.
uBid's most interesting investment angle is its relationship to former
parent Creative Computers, a public company that still owns 82 percent of the auction firm. Creative Computer intends to spin off its uBid shares to its own shareholders in June.
