Buy.com- An investment Opportunity or another Internet Bomb?
If you ask someone to name the top 10 product based internet companies, Buy.com will most surely come up. The company is one of the largest online computer software hardware retailers after Amazon.com.
The company focuses mainly on selling computer products at rock-bottom prices. The prices are so low, in fact, that many say they are selling at a loss. Part of the companies strategy is to sell products at or below costs and make money on advertising banners.
Like most Internet-based companies, there is nothing unique about its advertising. Simple ad banners appear on their site like most other companies. Will this strategy work? Many are now very skeptical. The company is selling for approximately $155 million dollars which has been getting close to its cash value of $110 million dollars. This looks very cheap.
However, its cash value continues to fall because the company has been losing money. It has been losing lots of money. For the nine months ended 9/30/00, net revenues rose 49% to $591 million. Net loss rose 20% to $97 million. This company is losing some serious cash. Many analyst and others are watching closely to see how well they do through the Christmas season which has been very important to many retail companies. It looks like the company will need another cash infusion after the Christmas season in order to continue operating.
The company offers superior customer service as compared to other Internet companies by offering 24/7 voice/email support. If not satisfied with a product, the company will allow you to return it with 30days. Order execution is excellent also. As soon as the order is placed, the processing occurs. Usually if the item is within stock, it will be shipped out within 24 hours which compares favorable to the 2day processing period which is common with other companies.
Buy.com’s website is one of the most user friendly on the web. Users can navigate the site with greater ease than many of the larger sites such as Amazon.com. The site speed is very good, and the site doesn’t seem to have the site down for maintenance periods like many other companies have at night.
One of the biggest worries for a company like Buy.com is its pricing. The company frequently has free shipping/handling weekends and discount coupons. Discounts of $20 off of a $100 order are not uncommon. Add this to prices that are ready rock bottom before the discount, and we are talking about some serious losses. The company is planning on doing some TV ads for this Christmas season. This will most likely further increase losses.
Unlike some companies which have some prices low (loss leader), Buy.com has nearly all of their computer hardware products priced as loss leaders.
In order to continue to operate this way without a cash infusion, the company needs to make more money from advertising and/or purchase inventory at lower prices. In my opinion, I don’t believe the company can do either of these. Simple banner ads rates are competitive throughout the industry. Many other hardware company are also selling ad space. The other option to purchase inventory at lower rates. Buy.com is still a very small buyer as compared to companies such as Wal-Mart or Best Buy. In order to negotiate better pricing, the company must very large and have leverage to negotiate. Buy.com doesn’t seem to offer this yet and so it is most likely purchasing its products at a cost similar to its competitors.
For these reasons, I believe that Buy.com is a bad investment. If the company changes its pricing, the conclusion may be different, but as it is now, the company is working its way to the grave.
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