AMZN:(Amazon.com): While we believe AMZN is the premier online bookseller, both in terms of selection and service, we find the stock's stratospheric current price to be unjustified. Internet momentum junkies have pumped this one up to unsustainable valuation levels. AMZN has enjoyed rapid growth and now ranks as the 3rd largest U.S. bookseller but it is expected to be unprofitable both this year and next year. Competition in its home online market is heating up from both Borders and a rejuvenated Barnes & Noble site. We expect margin pressure to hurt results. We also view AMZN's sole focus on online retailing as a negative for future growth--there will always be many people who prefer to shop in a bookstore. With the intensified competition and a lessening of internet fever, we expect this stock to get walloped. The stock has recently entered a downtrend after a failed double top. This looks like a short to us. While we believe AMZN is the premier online bookseller, both in terms of selection and service, we find the stock's stratospheric current price to be unjustified. Internet momentum junkies have pumped this one up to unsustainable valuation levels. AMZN has enjoyed rapid growth and now ranks as the 3rd largest U.S. bookseller but it is expected to be unprofitable both this year and next year. Competition in its home online market is heating up from both Borders and a rejuvenated Barnes & Noble site. We expect margin pressure to hurt results. We also view AMZN's sole focus on online retailing as a negative for future growth--there will always be many people who prefer to shop in a bookstore. With the intensified competition and a lessening of internet fever, we expect this stock to get walloped. The stock has recently entered a downtrend after a failed double top. This looks like a short to us. (5/22/98)

We also like LYCOS (LCOS) as a short. Lycos in many respects has been left behind in the race to be the premier search engine/internet portal. We see them falling farther and farther behind Yahoo in name recognition and use. Trading at an astronomical 293 times next year's earnings, with a PEG of 6, this stock has entered a downturn which we expect to continue.(5/22/98)

Compare the valuation levels of EBay and another well known auction house, paying particular attention to the PEG ratios.(11/25/98)

ONSL:(Onsale Inc): The stock of internet retailer Onsale has risen 800% since October 7th.  Spurred on by the rapid rise in shares of  internet auctioneer eBay, speculators turned their eyes to the perceived "bargains" in the online auction business--i.e. Onsale.  The meteoric rise of ONSL is due entirely to one key word: internet.

In the rush to buy anything with the word internet associated with it, investors have lost sight of one basic fact:  the underlying business.  The primary business of a seller of  widgets is selling widgets, whether the vendor's primary retail location is a store or an internet website.   The underlying nature of the business is not magically transformed by the move to a different store front (in this case a web site).  Onsale's primary business is the selling of excess merchandise:  refurbished and close out products.  The close out retailing segment has never managed to become anything but a niche business, an also ran, in the retail store industry.  The industry's introduction to the internet does nothing to change this fact.  Onsale's product mix includes computers, peripherals, consumer electronics, housewares, sports and fitness equipment, and travel packages.   The company has injected some excitement into the mundane close out segment with its use of interactive auctions.  The auction format allows buyers to interact, and compete with other buyers.  The results of this competition are frequent bidding wars between buyers.  These bidding wars frequently result in prices that are above what could be obtained elsewhere.  We question whether customers will continue to pay more for products once the initial uniqueness of participating in an auction wears off.   But an eventual waning of enthusiasm is the least of the company's worries.

Onsale's latest 10K filing with the S.E.C.  detailed the many risks that the company faces, and the uncertainty that its business model will be successful.  The company is facing increasing competition in the online auction market.  There are now several merchants that compete directly with the company's product lines.  The barriers to entry are low--the software to set up an online auction business is readily available.  The company's 10K says that "increased competition is likely to result in reduced operating margins, loss of market share, and a diminished brand franchise, any of which could materially adversely affect the company's business, results of operation, and financial results."   The greatest competitive threat the company faces is the possibility that computer makers will enter the auction business themselves.  Many of the company's suppliers already sell equipment via their internet sites, and the introduction of close out auctions would increase the suppliers' margins  and at the same time strengthen their relationships with  customers. 

The increasingly competitive nature of the online auction business, coupled with Onsale's rapid expansion, has led to a sharp increase in ONSL's operating expenses and to a decrease in operating margins.  The company expects its sales and marketing spending to increase as it "continues to enhance its brand recognition through marketing alliances. However there can be no assurance that the increase in expenses will result in enhanced brand recognition."   The company states that because of the "evolving and unpredictable nature of its business" it is uncertain whether the ONSALE brand name will be accepted by consumers. 

Other risks cited by the company are its reliance on other internet companies to drive traffic to its site, the inventory and price risks of the company purchasing and warehousing merchandise, the uncertainties of introducing new categories of merchandise, and unreconciled merchandise adjustments.

  The company formerly operated under the name Pivot Rules, which according to the company's December prospectus, "designed and marketed a full collection of golf sportswear for men under the Pivot Rules brand name. In June 1998, the company decided to discontinue the operations of its golf sportswear division and devote all of the company's resources to build Bluefly.com."  The company intends to become the leading online off-price apparel retailer.

Bluefly.com had gross revenues of $300,000 in its first 3 months of operation (a period that included the important Christmas shopping season).  The website attracted 664,000 unique visitors in December and had 26,000 registered users (It should be noted that registration is required to use the company's MyCatalog personalized search feature, and thus not all registered users are necessarily actual buyers).  The portal deals and increased marketing spending will boost revenues and name recognition in coming quarters.  While the company's business plan and initial results show promise, there are several hurdles which it must overcome before its current valuation levels can be justified.

Like many other internet startups,  BFLY's current valuations discount future growth and do not take into account the inevitable risk inherent in any startup business.  A non internet based company must show results and staying power before it is accorded a higher stock price.  In the current environment, an internet based company need not show results--only a vision for the future.  The reality is that the chances of a startup retail  business succeeding are not increased merely because the company eschews the traditional milieu of the land based store for the newer internet based model.

Because we are not immune to the cynicism which is endemic among denizens of our town, there are several risks, uncertainties, and statements detailed in the company's filings and prospectus that give us cause for concern.   Chief among them perhaps, is management's discussion of its discontinued Pivot Rules division, "The golf sportswear division had been operating at a loss, and despite efforts to promote the brand, orders for the sportswear collection had been significantly below the Company's business plan and even further below last year's level."  This does not give us a lot of confidence that the transition from startup to established off-price retailer will be a smooth one for Bluefly.com.  An apparel retailer, whether store based or internet based, is subject to the cyclicality and sudden changes in trend that are a way of life in the clothing business.  While the golf division had been profitable in several prior years, it was not immune to the fickle nature of the fashion industry.  There have been very few apparel based retailers   that have not at some point been caught on the wrong side of a trend.   Merchandise markdowns to sell excess inventory, and their accompanying lower margins, are the end results when a company temporarily misses the fashion parade.

The volatile nature of the apparel business is not the only risk the company faces.  While the company considers itself to be  the pioneer in bringing the off-price apparel concept to the internet, it now has competitors.   Designers Direct and America Off Price both run off-price e-commerce sites that feature designer clothing at 25-75% off retail prices.  The company must also compete for customers with TV's QVC , catalog merchants, and traditional off-price clothing stores. Bluefly "expects its competition to intensify and believes the list of competitors will grow."  The company is starting with a new brand, and must compete for customers and merchandise with better financed giants like TJ Maxx and Marshall's which are able to buy in larger volume (and get better terms).  If the internet based off-price business shows signs of being viable, we expect the giant chains to swiftly move in.   There is also no certainty that internet based end-of-season apparel retailing will take off.  While the internet offers 24 hour shopping and ease of use, there will always be many consumers who prefer to have a changing room available to try on their clothing before buying it. 

Lack of profits  are another cause for concern.  The profit potential of  online off-priced retailing is still unknown.   The company expects to incur losses for the "foreseeable future" as it increases its marketing  expenses .  Spending on advertising and the necessary infrastructure to become an industry leader will require additional financing. Margins will likely come under pressure as competition mounts.  The company must also continually stay abreast of the latest technology, and incur the necessary expenses to acquire it. 

DoubleClick's primary operating divisions include: the DoubleClick Network ( a C.P.M. based advertising network), DoubleClick Direct (a pay-per-click ad network), and its DART service which provides advertisers with a technology that allows them to measure in real time the effectiveness of their ads and to dynamically deliver their ads to targeted audiences.   Although the company's DART technology has received accolades from the press and has been the subject of many a glowing analyst report over the past 6 months, the technology is an insignificant part of the company's total revenues.  Substantially all of the company's revenues to date have come from the cost-per-thousand (C.P.M.) based DoubleClick Network.  This troubles us because C.P.M. rates have been in a steady decline across the industry over the past year. When a company's principal revenue producing product is experiencing downward pricing pressure, we usually take that as a warning sign to exit the stock.

The reliance on C.P.M. based ads for its revenues is also troubling because the effectiveness of banner advertising has been declining over the past year.   Click-through rates in the industry, which once averaged 2-2.5% , have declined to 0.5-1.0% in the past few months.  We question how long advertisers will be willing to put up with diminishing rates of return on their banner ad dollars before either exerting some serious downward pricing pressure on the prices of banner-based ad contracts, or abandoning the banner method of delivering ads in favor of an alternate means of advertising their products.

The unproven acceptance and effectiveness of web advertising continue to be troubling, but other problems exist as well.  One problem (the existence of which many of the visitors to our web site will be delighted to hear about) is filtering software which allows an end user to limit or block the delivery of advertisements to their web browser.  Competition for ad dollars is also a concern.   The company must compete with AOL, Yahoo, traditional ad agencies and others for advertiser's Internet ad dollars. 

Perhaps more troubling than competition, or falling C.P.M. rates in the industry, is DoubleClick's heavy reliance on just 4 Web Site clients for 60% of its revenues.  Advertising revenues from search engine Alta Vista alone account for 47% of the DCLK's revenue (the company recently renewed its contract with AltaVista).  DoubleClick  continues to rely on the growth of ad dollars from its contract with Alta Vista for its own growth.  A slowdown in Alta Vista's growth, or a decline in the number of visitors using Alta Vista, would lead to fewer ad dollars coming to DoubleClick and have a serious negative impact upon the company.