Newegg Inc. has built a brisk business selling low-priced digital devices and consumer electronics over the Internet. Now, the City of Industry online retailer is hoping investors like what it does as much as customers do.
Newegg, which claims to be the largest Internet-only retailer in the country behind Amazon.com Inc., filed a prospectus last week with the Securities and Exchange Commission to go public. The company hopes to raise $175 million from its initial public offering.
Newegg started life as a niche seller of computer parts such as memory cards that tech-savvy customers could install themselves. The company then expanded into consumer electronics and general merchandise, ranging from handbags to car door handles.
However, Newegg’s core electronics business is what’s expected to power its growth on the public market.
“The stuff Newegg sells, mostly electronics, tends to sell very well online,” said Adam Sarner, research director with Gartner Inc. in Stamford, Conn. “We’re seeing more electronics and high tech devices and computer equipment move online, and these guys are well-positioned to grab that.”
It’s all a big step for Newegg, co-founded in 2000 by a duo of Asian immigrants and a U.S.-born engineer who had just $1,000 capital. But the company has seen blistering growth and until 2007 was a regular member of the Business Journal’s annual list of fastest-growing private companies. It ranked No. 10 on the Business Journal’s list of largest private companies in Los Angeles County in 2008 when it raked in more than $2.1 billion.
Newegg has not said when it plans to go to market, but it’s dipping its toe into the game at a time when IPOs are back in vogue. Over the past two months, 15 companies have filed to go public in the United States, a number not seen since 2007. Last year, only three companies filed to go public in August and September.
“We’re starting to see the financial market stage a bit of a recovery,” said Kathleen Smith, principal at Renaissance Capital, an IPO tracking firm based in Greenwich, Conn.
Newegg executives declined to comment on the IPO.
Part of the reason Newegg has been so successful is its willingness to accept low profit margins, a fact underscored by financial information in the prospectus.
Thin margin
While Newegg’s revenue doubled between 2005 and 2008, it typically has had profit margins of less than 1 percent. Last year it had its most profitable year ever, when it made $28.8 million, a margin of just 1.4 percent.
Nevertheless, the company has kept its balance sheet healthy. It listed only about $11 million in long-term debt in 2008, and $10.6 million at the end of the second quarter. It also reported having $42 million of cash and cash equivalents on hand.
The prospectus gives no indication that the company plans to pull back from its diversification strategy, which began in 2004 when it branched into other merchandise, such as video games and digital cameras. (Last year, it unveiled Neweggmall.com, an Amazon-style site that carries everything from shoes to diamonds.)
“It’s a natural progression of our business,” Bernard Luthi, Newegg’s then-vice president of merchandising told the Business Journal last year. “We’ve built a loyal customer base and we’re simply offering them the convenience of being able to shop for consumer goods.”
But Newegg’s strength remains in its core electronics business. And the prospectus indicates the company hopes to gain a good chunk of its future growth from outside the United States. Newegg said it planned to use about $25 million from IPO proceeds to expand its operations in China.
That move is being applauded by some analysts, given the numerous U.S. retailers from Best Buy Co. Inc. to Wal-Mart Stores Inc. that are making a concerted push to sell more electronics online. In effect, all its eggs won’t be in one basket.
“Consumer electronics is very competitive, and it looks to be getting more so,” said Jeffrey Grau, e-commerce analyst with research firm eMarketer Inc. in New York City.
For now, its Chinese division is in the red, with about $2 million lost in 2008. But losses at nascent overseas divisions are typical. Newegg wants to build a $10 million regional headquarters in a suburb of Shanghai.
The company also appears to be banking that personal ties between the Chinese and its executives one of its co-founders, Ken Lam, was a programmer in Hong Kong will help open doors.
“China is big for Newegg, and if they do it right, they could get a home run,” said Mark Brohan, vice president of research and product development at Internet Retailer, a Chicago-based monthly magazine that covers the industry. “The downside is they’re still dealing with a market that hasn’t jelled yet. China doesn’t have the e-commerce base that we have in the U.S.
Newegg is the latest in a slew of companies that have gone public as the economy shows signs of a turnaround.
Since Aug. 5, companies have raised more than $6 billion through public offerings.
Los Angeles has seen a fair share of IPOs in recent months, with Calabasas-based PennyMac Mortgage Investment Trust, Century City’s Colony Financial Inc. and Pasadena-based Western Asset Mortgage Capital Corp. filing or completing IPOs.
A rarity
But the majority of companies going public now are involved in industries that have seen cash infusions from the federal government, especially finance and alternative energy. Retailers such as Newegg have been rare.
Only one other retailer, online vitamin seller Vitacost.com Inc., has gone public since August, and it raised a relatively underwhelming $132 million. By comparison, A123 Systems, a manufacturer of lithium ion batteries for electric cars, raised $380 million when it went public the same day as Vitacost.
“It’s a little unusual in that we haven’t seen many retailers,” said Smith of Renaissance Capital. “We saw Vitacost come out in August, but investors sort of shrugged that one off.”
That’s not to say Newegg can’t be successful. And the public market has been kind to Newegg’s main competitor, Amazon.com, which has seen its share price jump from about $36 in November to more than $93 in September.
But Newegg also carries some risks. Its skimpy profit margins could be a red flag for investors who usually look for more cushion. For instance, Amazon had a profit of $645 million on $19.2 billion in sales in 2008, a margin of 3.3 percent more than double Newegg’s margin for that year.
