Web Sales May Be Lifting
Share Prices Too Easily


Make widget, sell widget, add Web site.

Stock prices for a growing number of companies are soaring on the burgeoning enthusiasm about the Internet and online shopping. Since November, brisk holiday sales on the Web have sent investors hunting for any company looking to expand its presence on the popular medium.

The impact has been felt in just about every, and any, Internet-related stock. The Chicago Board Options Exchange's Internet Index set a new high Monday at 426.96 and has doubled since mid-October. (Tuesday the index was down 11.4 to 415.56.) The market capitalization of Charles Schwab, which owns the largest online broker, jumped over securities behemoth Merrill Lynch this week. And after the close Thursday, as previously announced, America Online will join the blue-chip Standard & Poor's 500-stock index, further raising the demand for the Internet-service provider's shares.

What's more, a number of obscure small stocks are surging on the news of Web efforts. Heavyweight motorcycle manufacturer Bikers Dream more than doubled to 6 27/32 on the Nasdaq Stock Market as news reports about the company's planned Internet sales channel spread. Catalog specialty-retailer SkyMall has tripled since Christmas, after it announced faster-than-expected sales growth on its Web site. And Active Apparel Group, a tiny sportswear manufacturer, has increased by a factor of 15 after reporting new Internet retailing links. Tuesday, the New York company's stock rose 7 1/2 , or 65%, to 19.

"A lot of stocks are moving up on announcements of interest in e-tailing," says Keith Benjamin, Internet analyst at BancBoston Robertson Stephens. Fine-art auctioneer Sotheby's, for example, jumped 6% this month when a Merrill Lynch analyst mentioned the company's Internet prospects. Retailer Sharper Image's Web site was mentioned in news reports after Thanksgiving, helping the stock to an all-time high of 21 3/16 Nov. 30.

But companies touting their Web prowess this holiday season may be touching off too much optimism among investors, analysts warn. "Every day, people give me another new name" of a company that is getting on the Internet, says Mr. Benjamin. "But I don't think all of these companies will be able to deliver the numbers to support their stock price."

In fact, many of the companies surging on Web news are retailers that have been around for years trading at low prices because of relatively unglamorous businesses. SkyMall, based in Phoenix, went public in 1996, and never traded much higher than 10 before surging on the Internet news to 40 3/4 this week.

While "the Web is a viable business alternative, to assume that a business will dramatically increase because it has a Web site is extraordinarily premature," says Keith Mullins, a growth-stock analyst at Salomon Smith Barney. "E-Commerce is not a simple business; it's more challenging than retailing because it integrates the demands of retail and technology."

In fact, stock prices of many Internet retailers face hurdles after the initial proclamations about Web ventures. For one thing, the volatility in the stock surges as momentum-based investors and day traders quickly buy and sell shares. And many of the stocks have faded as the companies run into competition and damped enthusiasm.

At first, "they seem to be caught up in a frenzy," Mr. Benjamin says. But later, investors dump the stocks after realizing the company "is a laggard in a competitive field," or happens to be in a business that is "not a huge market."

K-tel International shows what can happen to an investor who jumps into a stock as soon as it goes online. In April, the stock more than quadrupled after the music-marketing company launched an online service, but by November, nearly all of that gain had disappeared. A similar gain in K-tel stock prompted by marketing alliances with Playboy Enterprises' Playboy Online and Microsoft slipped away last month after the company ran into problems maintaining Nasdaq Stock Market listing requirements.

The music company isn't alone. Computer-retailer Egghead.com, food-products company Zapata, herbal- and nutritional-supplement concern CVF Technologies and books retailer Books-A-Million have all fallen off recent highs hit after Internet announcements.

"It's a ton easier to issue a press release than it is to run a successful online business," says Lise Buyer, Internet analyst for Credit Suisse First Boston. "Those who have questions should study the case of well-known and well-run Barnes & Noble, which is having a hard time" competing online, she says.

Also, consumers often bring their dollars online at the expense of companies' bricks-and-mortar business. In many cases, the retailer's site introduction "is a defensive maneuver" that doesn't bring in new revenue, says Nicole Vanderbilt, senior analyst at Jupiter Communications, New York.

SkyMall wants to use the Web to expand its existing clientele that currently orders gift items from the company's airplane catalogs. But so far, the Internet sales boom hasn't led to greater-than-expected overall sales growth. "There has been some cannibalization of orders from the planes," says Robert M. Worsley, the company's president and chief executive.

By 1999, Mr. Worsley says he hopes SkyMall's Internet business will grow to about 20% of the company's sales. Overall, Jupiter projects that Internet retailing will grow to $41 billion in 2002 from about $7 billion this year. But even optimistic analysts say the first quarter of 1999 may be tough, as brisk sales in the fourth quarter create tough comparisons. Wall Street is also expected to serve up plenty of Internet IPOs next year to satisfy investors' hunger for the speculative stocks.

For now, though, many investors are more willing to buy on the first news of Net movement than they were a few months ago. In January, when Egghead initially announced its plan to move from computer stores to the Internet, the stock actually fell on the day. Today, however, such news is greeted more warmly as individual investors see Internet-stock gains as contagious and irresistible. "You can't say 'don't buy' because there's likely to be a greater fool out there" who will take it at a higher price, Credit Suisse First Boston's Ms. Buyer says.

--Thomas Granahan