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Why hot IPOs are cooling off
Editor in Chief
Investor ardor for Internet stocks ran high this spring but faded during the dog days of summer with many initial public offerings (IPOs) falling short of expectations.
Case in point: 1-800-Flowers.com, widely anticipated to do well, was priced at $21 per share but closed at $18.19 on its first day of trading. Later, the stock slipped even lower, hitting $13.50 at one point. That’s quite a shift from iTurf’s public debut in April when the online retailer’s stock value more than doubled on its first day of trading. Likewise, eToy’s stock nearly quadrupled in May.
Certainly, 1-800-Flowers.com hasn’t been the only IPO to get the cold shoulder from investors this summer (the drugstore sector has been the exception), however, its lukewarm reception was a wake-up call causing other Internet companies to postpone IPOs. The list includes fellow florist FTD.com, Garden.com, which sells plants and equipment, and Greatfood.com, a gourmet food site.
It sounds like a case of the “proverbial October blues,” says Bonnie Tonneson, a consumer e-commerce analyst at Hambrecht & Quist LLC in San Francisco. She looks back to last fall when the technology sector retrenched and many ‘98 IPOs were delayed. The overall market malaise this summer certainly hasn’t helped Internet IPOs. “With so much of the market driven by Internet stock, it’s hard (for IPOs) to escape that reverberation,” says Tonneson. A down market coupled with negative investor sentiment “makes it difficult to price a new issue.”
Imbalance in supply and demand was another problem. At one point during the summer there were 106 Internet IPOs in the pipeline, points out Rakesh Sood, vice president of equity research at Goldman Sachs in New York City. “When you have that much supply, it’s going to be difficult for investors to digest,” says Sood.
Whether Internet retailing IPOs will regain their panache for investors is a question up for debate. “There seems to be a shift in investor preference away from the consumer names and toward the e-business enablers such as software or infrastructure providers,” observes Karl Haller, a principal consultant at PricewaterhouseCoopers in New York City.
Some observers are downright bearish. David Menlow, president of IPO Financial Network in Millburn, N.J., puts Internet retailers at the bottom rung of the Internet stock ladder. “They just don’t have enough sizzle for investors,” says Menlow, pointing out that having an Internet strategy is no longer an exception but a necessity for retailers.
Others are more optimistic. “Investors haven’t necessarily lost their appetite for e-tailing IPOs, however, they will have a higher scrutiny,” says Tom Ortwein, managing director of equity capital markets at CIBC World Markets, an investment banking and brokerage firm in New York City. “In the current market environment, people aren’t going to invest simply on a concept. You have to have more than a dot-com after your name.”
This holiday season “people will see that Internet retailing is really going to take off,” says Sood, who looks for online shopping to triple during this year’s gift-giving period. Though investors will remain selective, he says, Internet IPOs could warm up again this fall.