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. Last Updated: 07/27/2016

Reality Bites for Online Traders




NEW YORK -- Wall Street is sounding a loud cry to e-retailers: Show us the money!


Investors seem to be losing patience with online companies like Amazon.com and eToys that have no immediate plans for profitability.


Internet retailing stocks have been in a free-fall recently, and analysts are steering clients away from the sector until there are signs that these companies are starting to reduce their losses.


That's a big change from just months ago, when it seemed the stock market couldn't get enough of the money-losing cybershops.


Amazon.com's stock is down more than 40 percent from its high of $113 in early December, due in part to its announcement earlier this month that it would post a wider fourth-quarter loss than expected.


Value America, an online department store, spent heavily on advertising last year, but continued to bleed money and decided in late December to chop half its 600 jobs and cut back substantially on its product line. Its shares, which peaked at about $50 in April, now sell for about $5.


Many other stocks, including toy shop eToys, music retailer CDnow and software merchant Beyond.com, have lost more than 60 percent of their value in recent months.


"People are starting to look at these online retailers a lot more critically, trying to assess whether their business models will really ever work," said John Sviokla, vice chairman at Diamond Technology Partners, a Chicago-based consulting firm. E-retailing stocks began soaring after a surprisingly strong holiday season in 1998, when it became clear that consumers were interested in buying on the web.


For most of 1999, investors ignored the fact that these companies weren't earning a dime. They believed it was a critical time for them to spend heavily to build their businesses and develop a customer base.


Eventually, investors hoped, profits would come.


"We went crazy last year as we watched the mouse-and-click world take off," said Alfred Goldman, chief market strategist at A.G. Edwards and Sons Inc. in St. Louis, Missouri. "If there was a dot-com in its name, people wanted to get in on it, regardless of what the balance sheet looked like."


But wary investors now question whether the businesses can stay afloat if they keep losing money.


A big concern is increasing price competition online. Since consumers look for cheap deals on the web, many cybershops are discounting heavily, regardless of what it does to the bottom line. Increasingly, the sites are offering free shipping, another curb on profits.


Many web merchants are also pouring millions of dollars into advertising, some spending as much to promote their sites as they bring in annually in sales.


Moreover, web-only merchants like Amazon.com are no longer alone on the Internet playing field. Many traditional chains, including deep-pocketed corporations like Wal-Mart and Sears, have aggressive plans for a dominant place on the Internet.


E-retailers "are finding new competition on the web from merchants who have had their brand name in front of consumers for many years," said Alan Skrainka, chief market strategist at Edward Jones, an investment firm in St. Louis.With few companies that do business solely online giving a clear blueprint of when profits might come, many analysts are encouraging their clients to buy other stocks for now.


They are recommending profitable e-commerce models like eBay and Internet service providers and portals such as Yahoo!, which are news and information sites that act as gateways to the web. Also in favor are companies that provide computer software and systems for the Internet and those that handle business-to-business services, such as the purchasing of supplies.


"The name of the game is to drive profits. That's it," said John Segrich, an analyst at CIBC World Markets.