StreetBeat: eToys
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StreetBeat: eToys
This edition of StreetBeat looks at eToys, an online retailer of children's
products. With Christmas shopping right around the corner, and many anticipating a huge
surge in online shopping, we decided to take a closer look eToys and the challenges they
will face as the competition heats up. Joining us to discuss the prospects for this
company are Mitch Bartlett, Analyst at Dain Rauscher Wessels, and Chris
Vroom, Analyst at Thomas Weisel Partners.
Q&A
Briefing.com: eToys recently warned that Q3 marketing expenses will be 30%
higher than anticipated, in effect, doubling their per customer acquisition cost. Is this
company overspending, or is this aggressive approach necessary to build their brand in the
face of increasing competition?
Mitch Bartlett: eToys has enjoyed the distinct advantage of being the
first-mover, and have been far ahead of the competition in terms of brand recognition. But
with the surge in marketing spending from their competitors, we believe eToys is at the
point where they must accelerate their spending. This process is expensive, but its time
to take a step back, look at the overall picture and make the decision - do you want to be
the leader of the pack, or do you want to fall behind? We view this increase in
spending as an offensive and defensive strategic move. 5-7 years from now, this
current expense will seem insignificant.
Chris Vroom: By serving the customer better, eToys has established
a powerful brand franchise. However, we expect this Christmas season to represent an
important inflection point in consumer adoption of the Internet as a viable channel of
distribution. While heavy marketing spending may depress near-term profitability, in
our view, the long-term promise of the business model is unchanged. In fact, we believe
that the increased marketing spending will serve to accelerate adoption of the net as a
shopping channel.
Briefing.com: The recent price correction in eToys stock saw the issue drop
about 20% to the low $50 level, where it has since lingered. Is this stock now fairly
valued, or do you see the dip as a good buying opportunity going into the holidays?
Mitch Bartlett: On October 29, we lowered our rating from buy to neutral,
based on valuation, which was at the premium end of comparable eCommerce companies. It
still has a very high valuation and we would look for the stock to move in a little
further before we would recommend purchasing the stock. We look for eToys to break
below $40 before recommending its purchase.
Chris Vroom: We believe that eToys is exploiting a $75 billion market
opportunity and that the Company itself has the potential to grow to at least $10
billion in sales. In this context, the current valuation is extremely attractive, in
our view. Moreover, we see eToys sustaining just about the best sales momentum of any
e-commerce company over the next two years, which should also support a premium valuation.
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