Skip to Content
Stock Analyst Update

Long-Term Prospects Still Hazy for Buy.com

Gross-margin improvement offset by slowing growth, continuing losses.

Computer and electronics e-tailer Buy.com (BUYX) continues to reduce losses and improve margins, but growth is slowing and profitability remains a distant dream. Though the company has done a lot of things right lately, its long-term prospects are still hazy.

Buy.com's net loss for the second quarter (excluding noncash charges) was $0.18 a share, $0.05 better than analysts' estimates. Its gross margin grew impressively to 6.1%, versus 4.3% last quarter and negative 1.1% for all of 1999. But given that Buy.com, unlike most e-tailers, subtracts fulfillment costs (the cost of getting products to customers) before calculating gross margin, Buy.com's gross margin of 6.1% actually compares quite favorably to Amazon.com's (AMZN) 8%.

However, Buy.com's sales growth was weaker than expected. Its revenue of $193 million was just 49% higher than a year ago, compared with last quarter's 92% growth. Sequentially, revenue declined 7% from first-quarter levels, the first sequential drop in the company's history. Amazon reported weaker-than-expected revenues on Wednesday, so growth among consumer e-tailers may be slowing down in general. It will not be clear until the fourth quarter whether this is a long-term trend or a seasonal blip.

The big question for Buy.com is when it might become profitable. The company's gross-margin improvements have been impressive, but its operating margins barely budged this quarter, moving from negative 15.3% to negative 14.5%. CEO Greg Hawkins estimates that it will take about two years for Buy.com to start generating positive cash flows, so the company's $140 million in cash reserves will have to last at least that long.

Even though Hawkins expects the cash to last, a lot can happen in two years. Given the long time horizon and the inherent uncertainty of Internet business models, Buy.com is a very risky stock.