NY Times on Internet retailing

by: David Jackson

The NY Times has a perplexing survey of the Internet retailing stocks in its Sunday business section. The article, Is Online Retailing a Victim of Its Own Success?, argues that online retailing is growing fast, but the outlook for the stocks is uncertain.

According to the article,

"Professional investors are divided over whether the declines [in the stocks in January] are just a glitch in an upward trend or the start of a more serious fall".

So far so good. But the article then goes on to quote the views of a handful of sell-side analysts and buy-side portfolio managers. And some of those opinions seem highly questionable in light of comments made last week on companies' conference calls.

For example:

Then there are the search engine operators that help consumers in online comparison shopping. These include Shopping.com and BizRate.com, while more diverse online businesses like Google and Yahoo have been strengthening their shopping search functions, Mr. Rashtchy said. He finds the best online retailing investments among search companies. "Search still has tremendous growth in it," he said. "It's the most efficient way to acquire customers. Google is in a good spot, and Yahoo,  Ask Jeeves and Shopping.com are going to be prime beneficiaries" of a trend toward use of comparison-shopping sites.

Henry Ellenbogen, an Internet analyst at T. Rowe Price, is not so sure. The comparison-shopping sites generate revenue when companies pay to advertise on them; in turn, they pay for ads on bigger search engines like Google. Mr. Ellenbogen said the shopping sites could be squeezed as the search engine operators raised advertising rates.

Why is this questionable? Because Shopping.com explicitly stated on its conference call that the spread between the price at which it buys traffic via PPC search engine ads and the price at which it sells outbound clicks to merchants' sites has widened. And Shopping.com's chief revenue officer (as if the CEO isn't interested in revenue, right?) stated that while there was natural pushback from merchants to the company's recent price hike, the return on investment from advertising on Shopping.com is so high that not a single merchant had withdrawn its business.

Full disclosure: at the time of writing I'm long SHOP.