January 4, 2012, 3:33 PM

A rocky 2011 for e-commerce stocks

The Internet Retailer Online Retail Index declined 10.85% for the year.

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While many online retailers reaped big sales gains in 2011, that didn’t translate into gains for the stocks of publicly traded online retailers and e-commerce technology providers. The Internet Retailer Online Retail Index, which tracks the stocks of 25 e-commerce firms, fell 10.85% in 2011.

That put the e-commerce index far behind the broader stock market, as the Dow Jones Industrial Average gained 5.53% in 2011, and the Standard & Poor’s 500 Index finished essentially flat, down only 0.04% for 2011.

Investors’ take on e-commerce seems out of kilter with growth in the sector; for example, only holiday sales grew 15.3% Nov. 1 through Dec. 26, according to comScore Inc. Part of the explanation is the pressure from Wall Street for e-commerce companies to show improving profit margins, says Colin Sebastian, an analyst who follows e-commerce stocks for securities firm Robert W. Baird & Co.

Amazon.com Inc., No. 1 in the Internet Retailer Top 500 Guide in particular contends with this pressure. In 2011, Amazon’s stock price closed at $173.10 compared with $180 at the end of 2010, a 3.83% decrease. Other companies that ran into headwinds in 2011 include Digital River Inc., a provider of e-commerce services to companies selling software and digital content online, and Netflix Inc., whose shares plummeted after consumers balked at a summer price increase. “Despite the Internet being very healthy, investors are becoming pickier,” Sebastian says. “They want to invest in growing companies with growing profit margins as well.” Netflix’s stock price fell by 60.56% from $175.70 at the end of 2010 to $69.29 at the end of last year. Digital River’s stock went from $34.42 to $15.05, a 56.28% decrease.

Smaller capitalized companies in particular might be hurt by investors seeking better returns, suggests Herman Leung, a senior investment analyst at Susquehanna Financial Group. There always is a “flight to quality” among some investors, he says. In 2011, these investors would have been drawn to companies considered to garner larger market share gains, he says.

Despite the index’s performance, Sebastian is resolute about his confidence in the Internet economy. “Even within the Internet there are safe havens,” he says. “Investors aren’t going to be too concerned if they invest in Google Inc. that they’re money won’t be there a year from now.”

He’s not alone in that confidence. A recent report by Wall Street investment bank Goldman Sachs presented a bullish view on Internet stocks in general and e-commerce companies in particular. “E-commerce will will steadily gain share of both retail and travel spending as consumers take advantage of superior pricing, selection and product discovery online, while offline retail suffers from declining scale—leaner inventory, smaller store footprints and fewer stores overall.”

For the year, eGain Communications Corp., a provider of contact center technology, outdid all other e-commerce stocks with a 431.53% gain in its stock price, going from $1.30 at the end of 2010 to $6.91 on Dec. 31, 2011. Notably, much of the increase occurred in late October following the company’s Oct. 11 entry into the Nasdaq Stock Market Inc.

Here are the best-performing stocks for 2011 in the Internet Retailer Online Retail Index and the percentage increase in stock price for each:

eGain, 431.5%

Coastal Contacts, 54.6%

Keynote Systems, 40.5%

DemandTec, 21.5%

Systemax, 16.4%

Here are the Online Retail Index stocks that performed least well in 2011 and the percentage loss in stock price for each:

Bidz.com, 61.9%

Netflix, 60.6%

Digital River, 56.3%

Overstock.com, 52.4%

U.S. Auto Parts Network, 48%

As for last week, the Internet Retailer Online Retail Index was down 0.72% from the week prior.

Here are the best-performing stocks last week in the index and the percentage increase in stock price for each:

Bluefly, 18%

Bidz.com, 9.8%

Blue Nile, 4.9%

PetMed Express, 2.6%

Akamai, 1.3%

Here are the Online Retail Index stocks that performed least well last week and the percentage loss in stock price for the week:

U.S. Auto Parts Network, -9.0%

Shutterfly, -4.9%

Netflix, -4.6%

Vitacost, -4.2%

United Online, -3.6%

The 25 companies in the Internet Retailer Online Retail Index are: 1-800-Flowers.com Inc., Akamai Technologies, Amazon.com Inc., American Greetings Corp., Bidz.com Inc., Blue Nile Inc., Bluefly Inc., Coastal Contacts Inc., DemandTec Inc., Digital River Inc., eBay Inc., eGain Communications Corp., Keynote Systems Inc., LivePerson Inc., Netflix Inc., NutriSystem Inc., Overstock.com Inc., PetMed Express Inc., Shutterfly Inc., Systemax Inc., U.S. Auto Parts Network, United Online Inc. (owner of FTD.com), ValueClick Inc., Vistaprint Ltd and Vitacost.com Inc.

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