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Tuesday, Jun 6, 2023

EToys: Stock Went From Hot to Shot

Anyone seeking to contrast the euphoria that greeted Internet commerce companies going public last year with the silence they’re facing from investors now need look no further than eToys Inc.

When the Santa Monica toy e-tailer went public last May, its shares shot up from their $20 initial offer price to $80 on the first day of trading, and proceeded to an all-time high of $86 in October. Last week, with tech stocks swinging wildly, eToys’ share price hit a new low of $6.75. It closed on April 6 at $9.19.

Suffice to say that investors’ exuberance has been replaced by skepticism, despite the fact that many analysts remain bullish about the company’s long-term potential.

EToys officials didn’t return repeated phone calls seeking comment.

The drop in eToys’ share price didn’t happen overnight. The stock fell during last year’s holiday rush because of general concerns that Internet retailers wouldn’t be able to cope with demand, and eToys had order-fulfillment problems, which alienated some potential customers.

Then, the quick competitive response by Toys ‘R’ Us, the nation’s leading toy retailer, to ramp up its own online presence surprised a lot of people. Nonetheless, eToys drew more visitors to its site during the holidays and continues to do so now. But even that success has proved to be a double-edged sword.

“With the exception of one week during Thanksgiving, eToys had more traffic that Toys ‘R’ Us in November and December. But they couldn’t capitalize on that, because it overwhelmed their site, and lots of customers were turned away,” said Sasha Kostadinov, e-commerce analyst at McDonald Investments.

Combine those factors with a growing conviction among investors that a $7 billion market valuation for a brand-new company that loses money is excessive, and you get a downturn in stock price.

The company’s growth in sales and site traffic has been impressive, and its management team is generally well respected by both the technology and Wall Street communities. But it is facing competition not only from Toys ‘R’ Us, but from Amazon.com, which in its push to become the Wal-Mart of the Internet now sells toys. Even Wal-Mart Stores itself is posing a threat with its online presence.

EToys listed about $220 million in cash and other liquid assets on its balance sheet as of its most recently reported quarter, so it can continue to lose money for some time. But at some point, especially if its stock languishes, it is going to have to get additional financing, either through a secondary stock offering or through the debt markets.

“EToys does have to do another financing, but they don’t have to do it today,” Kostadinov said. “I don’t expect them to have trouble getting financing, (but) they’ll have trouble getting financing at the same valuation. That means they’re going to have to give up a bigger piece of the pie, if they do another public financing.”

If the secondary offering price is below that of its IPO, that is hardly a ringing endorsement for eToys, market analysts pointed out.

“If you do a secondary at a lower price than the IPO, it means two things,” said Lloyd Greif, president of investment bank Greif & Co. “It is a sign of desperation by the company and it shows what a bad deal the first offering was.”

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