Online consumer electronics retailer iBuyDigital.com just filed an S-1; underwriters are Merriman Curhan Ford & Co. and Oppenheimer & Co. The proposed ticker is IBUY. Here's a quick overview of the filing, five reasons why you should be careful of this IPO, and implications for other stocks including ECST, OSTK, SHOP, YHOO and GOOG.
IBuyDigital runs multiple etail Web sites: IBuyDigital.com, IBuyplasma.com, DBuys.com, DigitalMegastore.com, CentralDigital.com and realdealshop.com. It fulfils orders for these sites from a central distribution facility located in Brooklyn, New York. These sites sell
electronics products to consumers (no business to business sales here). The company reported revenue of $44.7 million in the first nine months
of 2004, versus $42.7 million for same period in 2003. And remember - the biggest quarter for consumer electronics sales is Q4, which isn't in these numbers.
Why would you buy IBUY stock?
Well, it seems like a great play on growing demand for consumer electronics. The digitization of music, TV, and broadcasting and the transition to digital cameras and flat panel TVs means that sales of consumer electronics are growing fast. In fact, consumer technology is arguably a more attractive sector for investment than enterprise technology.
But here are 5 reasons to be wary of the IBUY IPO:
1. Lack of competitive differentiation. The S-1 states that IBUY's value proposition to consumers is "Ready Access to
Products...Value Pricing...Well-Established and Trusted Source for Products... Positive Customer Experience..." Doesn't sound very
differerentiated from every other etail business.
2. Highly seasonal business. According to the S-1, "Net sales in the fourth quarter of 2001, 2002 and 2003 were 48%, 33% and 30% of our total net sales for each of such years".
3. Dependence on comparison shopping engines. The S-1 states: "We depend on shopping comparison websites to attract a substantial portion of the individuals who visit our websites. Losing access to these sites, or being prevented from presenting more than one of our websites on these sites, could significantly decrease the number of individuals who visit our websites and purchase products from us, which could lead to a decline in revenues and profitability." Now bear in mind that Shopping.com and Bizrate just hiked their fees to merchants.
4. Family business. The CEO is Elliot Antebi. The VP Fulfilment is Barry Antebi. The Chairman of the Board is Mark Antebi. Mark Antebi is the father of Elliot Antebi, and Barry Antebi is the first cousin of Elliot Antebi and nephew of Mark Antebi. Now look at this little gem:
We entered into a one-year consulting agreement with Mr. Antebi, our chairman of the board, on December 14, 2004, under which Mr. Antebi provides consulting services as reasonably requested by us from time to time. Under the terms of the consulting agreement, Mr. Antebi will receive $85,000 as compensation for rendering such services, payable in equal monthly installments." Now that's what I call an independent Chairman of the Board.
5. Is the business really growing? Revenues actually fell slightly between 2002 and 2003. Numbers from the S-1: 2003 revenues were $61.2 million versus $61.4 million in 2002 and $30.1 million in 2001.
Implications for other stocks:
- More competition for Overstock, eCost and Amazon. Why should IBUY go public, other than to allow three family members to "diversify their assets", to use a favorite Wall Street euphamism? Because an IPO will generate publicity (=advertising) for IBuyDigital.com and its other Web sites, and because the capital infusion will allow it to increase its advertising budget.
- The ultimate beneficiaries of etail IPOs are the comparison shopping and general search engines. IBUY will likely spend its boosted advertising budget on pay-per-click ads provided by the comparison shopping engines. Why? IBUY will have to show revenue and customer growth to maintain its post-IPO valuation, and most of its customers come from comparison shopping engines (Shopping.com, Yahoo! Shopping, Shopzilla and Froogle). That probably won't change, because comparison shopping engines have higher conversion rates than general search engines and offer higher return on investment at current ad prices.
Here's the key point:
I've argued that the Internet results in greater price transparency, particularly with the advent of comparison shopping engines. That increases price competition, reduces brand loyalty and compresses retailers' margins. Profits will ultimately flow to the search and comparison shopping companies rather than the etailers.
How can you monitor whether this is in fact correct? With two litmus tests:
Test 1: the rate of repeat customers. If etailers report rising rates of repeat customers who go direct to their Web sites instead of starting their shopping with a search or price comparison, then they'll avoid rising PPC ad prices and demonstrate the value of their brands. IBUY's S-1 argues that this is the case:
We believe that we benefit, and over time will benefit to an even greater degree, from customers who are repeat buyers from us because they are more likely to access our websites directly or place orders by telephone, allowing us to avoid incurring click-through referral fees.
But now look at IBUY's repeat customer rates:
Given the lack of revenue growth between 2002 and 2003, the minor rise in repeat customers suggests that IBUY isn't generating brand loyalty. If revenues were actually down slightly in 2003, why didn't the rate of repeat customers rise?
Test 2: profit margins. If I'm right that comparison shopping will result in intense price competition and lack of brand loyalty, we'll see that in the etailers profit margins. Gross profit margins will be weak, and spending on marketing will be high (all those PPC ads). IBUY's gross profit margins for the first nine months of 2004 were 10.5%, and it spent 8.4% of revenue on SG&A. Not a good sign.
You can find the full IBUY S-1 here.
Full disclosure: at the time of writing I'm long SHOP.