October 8, 2008, 12:00 AM

Stock analyst cuts e-commerce forecast because of financial crisis

Sandeep Aggarwal is cutting his forecast of e-commerce growth by 3% in 2008, and by 6% and 7% for 2009 and 2010. He also is reducing his estimates for growth in Internet advertising.

The Wall Street meltdown will slow the growth of e-commerce and online advertising through 2010, predicts San Francisco-based stock analyst Sandeep Aggarwal of UK investment bank Collins Stewart LLC.

“Though we believe that both ‘Net advertising and e-commerce companies will continue to see secular shifts online and the Internet will continue to be one of the fastest-growing sectors, the sector is exposed to slowing growth due to a bleak macro economic outlook,” Aggarwal wrote last week in a note to investors.

He is cutting his forecast of U.S. e-commerce growth by 3% in 2008, and by 6% and 7% for 2009 and 2010. He is now predicting online retail spending will hit $145.1 billion this year, up 14% over last year, $162.5 billion in 2009, up 12%, and $185.3 billion in 2010, up 14%. He previously had projected U.S. e-commerce growth of 18%, 16% and 15% for 2008-2010.

For Internet advertising in the U.S., he is cutting his growth forecast by 2% for this year, 4% for 2009 and 5% for 2010. He now predicts U.S. online advertising spend will be $25.5 billion in 2008, up 20%, $30.2 billion in 2009, up 21%, and $36.0 billion in 2010, up 20%. He previously had projected growth rates of 23%, 21% and 20% for those three years.

Turning to specific companies, Aggarwal says e-commerce players like GSI Commerce and Digital River that have invested heavily in technology could show lower profits than expected if revenue growth slows. He also warns that companies that do considerable business abroad will suffer if the U.S. dollar appreciates as the global economy slows.

Other stock analysts are also issuing warnings about the impact of the economic crisis on online merchants and the companies that sell to them, even companies they consider fundamentally sound. Jim Friedland of Cowen and Company warns that growth is likely to slow at Shutterfly Inc., No. 76 in the Internet Retailer Top 500 Guide, because the prints, photo albums, cards and other digital photography products it sells are discretionary and priced higher than those of competitors. But Friedland says Shutterfly “offers a best-in-class product,” and he still predicts the online retailer’s revenue will grow 16% this year to $217.1 million from $186.7 million in 2007.

Meanwhile, citing economics “headwinds,” analyst Colin Sebastian of Lazard Capital Markets has cut his forecast for fourth quarter revenue and earnings at e-commerce technology vendor GSI from $430 million and $74.8 million to $420 million and $71 million. He now projects 2008 revenue at $1 billion, down from a previous estimate of $1.01 billion, but raised his forecast for 2009 revenue to $1.1 billion from $1.08 billion. GSI generated revenue of $750 million in 2007.

“We continue to believe that GSI remains in a strong competitive position, even in a market downturn,” Sebastian says.

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