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Stock Analyst Update

Buy.com Reducing Flow of Red Ink--Slowly

Gross margins are finally positive, but profitability is still a long way off.

Cut-rate electronics e-tailer Buy.com  showed Monday that it's making some progress on the road to profitability, but it's moving so slowly that it may not have enough money to complete the trip.

Buy.com announced a loss of $0.28 a share for the first quarter, its first as a public company. Revenue increased 92% over a year ago--an impressive number by most standards, but only fair to middling in the hypergrowth world of the Internet. Priceline.com (PCLN), for example, announced year-on-year revenue growth of 535% earlier on Monday. Sequentially, Buy.com's revenue only grew 3% over the fourth quarter, by far its slowest sequential growth rate ever.

The most significant number in Buy.com's earnings announcement was its gross margin of 4.3%, a vast improvement over last quarter's negative 0.8%. In fact, Buy.com's gross margins had been negative for the past five quarters--it has been selling products for less than it paid for them, in an attempt to gain customers. Once those customers are in place, the plan goes, the company will raise prices on selected items in order to start making money. It also plans to make money by selling advertising to companies that want to reach all those eyeballs.

Critics have been quick to ridicule this business plan as impractical, but during Monday's conference call, CEO Greg Hawkins trumpeted the company's positive gross margin as evidence that those critics are wrong. While the margin improvement is certainly a positive, Buy.com still has a long way to go before it can even think about making a net profit.

Its operating losses are still about 15% of sales, and even if that number improves, the company has only a limited amount of time before it runs out of money. Hawkins estimated during the call that annual sales would have to roughly triple from their current levels before the company could become profitable, assuming all goes well. But at the current growth rate, tripling revenue could take at least a couple of years, by which time the company's cash hoard would be long gone.

Thus, even under optimistic scenarios, Buy.com has a tough row to hoe if it's going to survive. It's taken some positive steps, but they've been baby steps in a business that expects huge, leaping strides.