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Stock Analyst Update

Webvan's Stock Is Only for Gamblers

Losses increase as company struggles to make its business model work.

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What Happened?
Online grocer Webvan (WBVN) announced Wednesday that its net loss (excluding noncash items) for the third quarter ending September 30 increased to $0.26 per share, compared with $0.24 in the second quarter. Revenue growth slowed during the same period from 74% to 47%, even though the company acquired rival HomeGrocer and began operations in Chicago during the quarter. CEO George Shaheen said that Webvan will need additional funding by the second half of 2001 to complete its planned expansion into the New York, Washington, D.C., and Seattle areas.

What It Means for Investors
Webvan still has not demonstrated that its business model can become profitable, and potential investors might just as well spend their money on lottery tickets. The company's flagship Oakland distribution center was supposed to be profitable by now, but it's still about 30% below the volume needed to break even, and chief operating officer Bob Swan admitted Wednesday that he's still "tweaking the dials" in an effort to match delivery capacity with demand. Webvan already announced last month that it's scaling back its expansion plans in order to preserve capital, and Wednesday it quietly reduced its 2001 revenue projection from $1.1 billion to $800 million.

Webvan's time is limited, but its progress has been agonizingly slow. It has $377 million in cash, but it burned through nearly $200 million last quarter, meaning it will have to cut spending drastically or get more funding soon. Most of the company's problems have already been factored into its stock price, which has fallen to around $1.50 from a 52-week high of $34. Even at that price, however, this is a very risky stock fit only for gamblers.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.