eBay leads Internet selloff

Shares of eBay Inc. (Nasdaq: EBAY) plunged 20 7/8, or 13 percent, to 145 Monday after the online auctioneer said it would lose between $3 million to $5 million in sales in its second quarter after losing service for more than 22 hours last week.

eBay's woes combined with the likelihood of a raise in short-term interest rates by the Fed and sluggish summer volume sent Internet stocks into a deep funk Monday.

Even EToys Inc. (Nasdaq: ETYS), which was started as a "market outperform" by its lead underwriter Goldman Sachs and a "buy" by co-manager BancBoston Robertson Stephens, fell 5 15/16, or 12 percent, to 43 7/8.

Clearly, eBay's technical difficulties and subsequent loss of revenue raised some more alarms in the Internet investment community. When your whole business is so desperately reliant on technology, these are the risks.

"All of these Internet companies go to great lengths to point the risks associated with technical problems," said Derek Brown, an analyst at Volpe Brown Whelan & Co. "Every Internet prospectus points out again and again how critical reliability is for their business."

In eBay's case, it appears that some Sun Microsystems Inc. (Nasdaq: SUNW) software was the culprit. While losing almost one day's worth of auctions and refunding some of the money to its customers is bad, it's not the end of the world.

Earlier this year, it was online brokerage firm E*Trade Group Inc. (Nasdaq: EGRP) that couldn't get its act together. E*Trade customers were left out in the cold for parts of three days when extremely high activity caused the service to falter.

And it wasn't too long ago that America Online Inc. (NYSE: AOL) was something of a laughingstock because of its repeated service outages and long delays.

In both cases, it was strong demand that pushed these companies' services to the breaking point. Once these technical issues are sorted out, the stocks and the companies' earnings will resume their rise.

"This technical problem with eBay is part of the problem with Internet stocks today," Brown said. "It's another example of how these companies are a bit at the mercy of technology from other companies. But it's also the time of the year, the interest-rate increase that's probably coming and still some profit-taking."

Among other widely held Internet stocks, AOL was off 5 1/8 to 94 3/8; Amazon.com Inc. (Nasdaq: AMZN) slid 7 1/8 to 98 11/16; DoubleClick Inc. (Nasdaq: DCLK) tumbled 10 5/16 to 78 1/2 after announcing an acquisition and NetGravity Inc. (Nasdaq: NETG) was down 2 11/16 to 18 1/4.

First Call consensus expects eBay to earn 5 cents a share in its second quarter, up from the 2 cents a share it earned in the year-ago quarter.

eBay shares peaked at 234 in April.