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Tech Industry

Two IPOs could meet resistance

Buy.com and Pets.com could face a skeptical audience when their initial public offerings debut next week.

Despite a recent stock market rebound, two online retailers may face a skeptical audience when their initial public offerings debut next week.

Buy.com, which sells consumer goods, and Pets.com, an online pet-products retailer, could face investor indifference, analysts said.

"Buy.com has negative margins," said Richard Peterson, an IPO analyst with Thomson Financial Securities Data. "Even though Amazon isn't profitable, at least they make money on their products. Buy.com sells below cost, so they lose about 1 to 2 percent on each product they sell. They say that even though they sell at a loss, they plan to make it up with traffic and their ads."

He added that it's an unusual strategy and one that may be good for consumers but not for investors.

According to its IPO filing with the Securities and Exchange Commission, Buy.com "sometimes" sells products at negative gross margins. The company, however, has been adding higher-margin products to its mix.

"Credibility is important, and this company hasn't given good guidance on its future business model," said Jeff Hirschkorn, senior analyst with IPO.com. "Their current model doesn't work."

The company's founder and former chief executive, Scott Blum, resigned from the board of directors a month before the company filed to go public last October. Although he holds a 56 percent stake in the company, Blum has no voting power because his shares are held in a trust. The filing states that Blum "is required" to cease all involvement with Buy.com.

"Again, it's about credibility, and you don't know why Blum was forced out," Hirschkorn said.

Under SEC regulations, companies are not permitted to comment on their businesses just prior to an IPO.

Buy.com posted pro forma revenues of $597.8 million for the year ended Dec. 31, compared with $128.6 million a year ago. Meanwhile, its pro forma loss swelled to $145.8 million for the year, compared with a loss of $24 million the previous year.

The company plans to raise up to $168 million based on the high end of its $10 to $12 pricing range and 14 million shares it plans to sell. The company is expected to price tomorrow and begin trading Tuesday under the ticker "BUYX." Merrill Lynch is the lead underwriter.

Meanwhile, Pets.com plans to price its shares Thursday and begin trading Friday under the ticker "IPET."

The company's IPO coincides with a competitor's decision to also tap the public markets. Petsmart.com last week filed its IPO plans and seeks to raise $115 million.

Pets.com seeks to raise up to $82.5 million based on the high end of its $9 to $11 price range and the 7.5 million shares it plans to sell. Merrill Lynch is the lead underwriter.

"I don't think their offering will work," Hirschkorn said. "They generated $5 million in sales in the December quarter and had $42 million in losses. And in the September quarter, they had $568,000 in revenues and $15.9 million in losses."

Although online retail giant Amazon.com will hold a 30 percent stake in the company after the IPO, analysts said that may not be enough to draw investors.

"Look at Ashford.com and Drugstore.com, which also received an Amazon investment," Peterson said. "Their stocks initially had a flurry of interest and then dropped off."