Blowing the froth off e-tailers

Are you thinking of investing in If so, be honest. Have you concluded it is an excellent company that is going to win a significant amount of...

Are you thinking of investing in If so, be honest. Have you concluded it is an excellent company that is going to win a significant amount of business in its market niche, or are you just interested in making what will almost certainly be a few hundred pounds stagging the issue?

It's true that recent dotcom companies have attracted significant premiums on their stock market debut, and the mania surrounding promises it will be no exception. But some day the froth that surrounds the valuations of e-tailers will be blown away.

Think for a moment about what we are being asked to believe. According to the grey market (in which financial spread betting companies guestimate the opening price)'s share price is likely to be between 500p and 525p, a significant premium to the offer price of 190-230p.

This values the business at approximately £770m, a sizeable company by anyone's standards - and especially for a company that lost £6m in the final quarter of 1999.

It would be straightforward enough to compare to other e-commerce Web sites (, for example) and conclude that this valuation is fair.

You can bet that is what the brokers to the deal will be doing, coupling it with rosy projections based on the number of subscribers (inflated as they may be by prospective investors logging on to register for the share offer) and their projected spend.

But let's leave aside this fantasy world for a moment and compare with a company it may see as a competitor - Thomson Holidays, which coincidentally announced its 1999 results last week. It accompanied them with an announcement that it would invest £100m over the next two years in e-commerce, including the launch of several Web-based holiday services. Now compare the results in the table and you can see that the valuations are poles apart.

When you add in the inherent uncertainty that surrounds e-tailers - what happens if they lose a supplier, or stop spending on marketing, or a major competitor enters their market? - you begin to see that a solid business that can justify the market capitalisation is some way off.

It may be unfair to single out in this way and I really hope that its founders succeed and go on to build a business that justifies its valuation. But serious investors must find it increasingly difficult to swallow these price tags.

The real danger is that when the e-tailers' frothy valuations are blown away the share price of technology companies will suffer as well. That would be a shame, since the long-term growth rates of many IT companies justify their valuations and there is more to come.

Bricks-and-mortar versus dotcom

  Thomson Travel*
Formed 1965 1998
Turnover £3bn £0.6m
Profit/(loss) £77m (£6m)
Market capitalisation £980m £770m

*'s figures are for the last quarter of 1999, which are the latest available.

Ian Mitchell is an ITanalyst with stockbroker Beeson Gregory. His opinions should not be construed as investment advice.

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