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Amazon CEO Jeff Bezos addresses a press conference to introduce new Amazon and Kindle products in New York, September 28, 2011.Cyber Monday was unofficially coined in 2005 and has become one of the busiest days for online retailers.

On November 6, 2011, I identified the 4%+ median increase in the weekly stock performance of web-only retailers immediately following Cyber Monday and coined the phenomenon the “Cyber Monday Bump” (see: Cyber Monday Deals May Tank Valuations Of Web-Only Retailers)

A plausible explanation for the “Bump” relates to the amount of attention Shop.org, Forrester Research and dozens of news organizations give to the issue of year-over-year gains in online revenue. Investors love what is reported and voila, web-only online retail stocks go up.

20% Dump after "Cyber Monday Bump" Predicted

As the creator of the Web-only Retail Index, Seeking Alpha followers asked me to opine on how this year’s holiday season may impact valuations of public web-only retailers during earnings season.

Disclaimer: I hold web-only retailers in high regard and earn my living as an M&A investment banker in the sector.

My purpose in writing is to share actionable investment commentary. In other words, is there a valuation discrepancy? Based on my judgment as a banker in the sector I believe the public web-only retail stocks as a whole will lose 20% of their value by earnings season.

To be clear I’m not calling for a similar drop in valuation for multi-channel retailers such as Apple (NASDAQ:AAPL), Target (NYSE:TGT), Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST). I also don’t consider Netflix (NASDAQ:NFLX), Priceline (NASDAQ:PCLN) or Expedia (NASDAQ:EXPE) as web-only retailers for the purpose of the analysis.

What are three warning signs of the Dump?

  1. More than 92% of e-retailers say they’ll offer consumers free shipping on orders during the holiday gift-buying season, up from about 85% that said the same last year, according to survey results by Shop.org, the e-retail arm of the National Retail Federation trade group.
  2. Continued high unemployment (9.1%)
  3. The National Retail Federation expects shoppers to spend 4.6% less this year on gifts, or an average of about $516.

Why does free shipping and sales tax expense matter?

Consumers cite free shipping as a primary incentive to shop online. 74% of online consumers responding to a holiday survey from consulting firm Accenture in September said the biggest incentive for shopping online is free shipping.

The second most frequently cited incentive is finding better discounts (60%) which can sometimes stem from sales tax advantages (see: Valuations Of Web-Only Retailers Could Drop 25%)

Holiday Season More Merry than Earnings Season?

It is quite possible that shareholders may end up with a lump of coal in their stockings this year.

There is no such thing as free shipping from the perspective of the retailer. It is expensive and cuts into profit margins. Instead of cheers, there may be January boos during earnings season.

Because 92% of e-retailers say they’ll offer consumers free shipping (up 7%) on orders during the holiday gift-buying season.

Buckle your seatbelt or pull the ripcord. It's up to you.

Web-only Retail Index companies include Amazon (NASDAQ:AMZN), eBay ( EBAY), Overstock.com (OSTK), United Online (UNTD), Vistaprint (VPRT), 1-800-Flowers.com (FLWS), Nutrisystem (NTRI), Blue Nile (NILE), U.S. Auto Parts (PRTS), Vitacost (VITC), PedMed Express (PETS), Coastal Contacts (CSOAF.PK), Bluefly (BFLY) and Stamps.com (STMP).

(Click chart to enlarge)

Nov. Web-only Retail Index

Source: The 'Cyber Monday Bump' And The 20% Dump