Pets.com lacks bite on first day of trading
The company debuts on the public markets to little fanfare, climbing as high as $14 before closing at its $11 offering price.
The San Francisco-based e-tailer, which has made a name for itself through ads featuring a daffy sock puppet and its "because pets can't drive" motto, raised $82.5 million yesterday, selling 7.5 million shares for $11 each, at the top of its preliminary range.
"It's the IPO with fleas," said Richard Peterson, an analyst with Thomson Financial Securities Data.
Pets.com's dog day on the public market comes despite the company's pedigree. Not only does the company own the rights to arguably the most valuable and memorable pets-related Web address, but also it is aligned with e-commerce leader Amazon.com, which owns 30.4 percent of Pets.com.
But the market has become much more discriminating of e-commerce stocks lately, Peterson says. And the challenges facing Pets.com and the other online pet sites may outweigh their merits.
Competition in the online pet market is dog-eat-dog, with four different start-ups--including Petsmart.com, Petopia and Petstore.com--receiving major backing from venture capitalists and offline retailers. While none of the sites have been able to stand out from the pack, Petsmart.com leads Pets.com in traffic and in revenues, despite its affiliation with Amazon.
Pets.com's debut on the markets coincides with a general depression in online retail stocks. Barnesandnoble.com, for instance, has sunk to about $10.75, some 40 percent below the company's IPO price. Meanwhile, e-commerce bellwethers Amazon and eBay are down 27 percent and 26 percent, respectively, from their 52-week highs.
"Wall Street is not a big fan of these e-tail sites," said Alan Mak, financial analyst at Argus Research. "Because there is no leader (among the pets sites), there's nothing to get excited about."
Investors, who have become increasingly focused on profits and earnings
potential, have begun to move away from online retail stocks and into
business-to-business e-commerce stocks, where the profit margins are
typically higher, analysts say.
A company's profit margin is roughly the difference between what it charges customers for its goods or services and what those goods and services cost the company.
eBay, which primarily has to worry about keeping its computers up and running, has profit margins of about 70 percent. Amazon, which carries huge amounts of inventory and has to pay for shipping its products, typically has a profit margin of around 20 percent, although it sunk to about 13 percent in the fourth quarter.
Pets.com may have been doubly hurt by investors' focus on profits, because in addition to its big losses--Pets.com lost $42.4 million during the fourth quarter last year on $5.2 million in sales--the company is operating on negative profit margins. During the fourth quarter, Pets.com lost $6.4 million on its sales alone.
Pets.com's poor opening day performance is unlikely to affect other e-commerce offerings, analysts say. Despite having a similar resume--huge losses and negative margins--Buy.com doubled its offering price on its first day of trading Tuesday, and is up 66 percent from its IPO price.
But Pets.com's performance may indicate that the astounding success of e-commerce offerings last year is over.
"A year ago, Pets.com's stock may have doubled on its first day of trading," Thomson's Peterson said. "Now there's no guarantees."