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Dec 23, 1999

Of eToys and Dot-Coms

Stunning declines, unlike defeats, aren't orphans. If you hang out on our message boards, or if you go through my mailbox, you will find that there are many fathers of the stunning decline in eToys (Nasdaq:ETYS - news) during this Christmas season.

First, let's trot out the basic long case, so nobody can accuse me of trying to father or further the eToys bear. For almost every dot-com industry, a high Media Metrix (Nasdaq:MMXI - news) ranking is better than earnings. It can't be disappointing; it can only be interpreted as flat out positive. eToys has it in spades. These guys are anointed in a way that I, as a co-founder of TheStreet.com (Nasdaq:TSCM - news) , can only dream of.

But with the help of the readers, I am beginning to craft a much more dire picture of eToys, the stock, not the company, because, as is often the case in this millennium closing, the stock's trajectory has very little to do with the fundamentals.

First, eToys seems to represent a sped-up version of what has to happen eventually to all of the dot-coms: A phenomenal amount of stock is free to trade. Most of the dot-coms have restrictions on a massive portion of the shares outstanding. I have stated that lockup expirations, for the most part, simply cause a minor dip because the market can absorb most of the stock that comes free to trade. But the records show that eToys has a much greater float now than most dot-coms because so much stock has come off lockup. In fact, this was the mother of all lockup expirations. eToys issued 8 million shares earlier this year out of a total of 101 million shares. In November, most of those remaining shares came off lockup. And when the sales started hitting, the stock started breaking. Could this be the future of Net stocks when massive lockups get sprung? It is certainly worth watching.

Further, when eToys did its convert, the stock did not allow for the kind of hedging that convertible bondholders like. It fell too fast. It is possible that the holders of the paper simply booted it out at a loss rather than not be able to hedge out the risk by being short common. In other words, the convert deal was priced badly or sloppily and it hurt the new owners who just took some medicine and then moved on. Finally, a third reason for the decline might be some sort of sabotage of the site itself by dissident Web folk who are apparently enraged about a court battle eToys has had against Etoy.com, some small Swedish art site. The publicity over this tussle has apparently frightened some holders into selling.

My point of all of this is that this whole stock market is supply-and-demand driven, not fundamentally driven, and maybe eToys shows you what happens when there is a surfeit of supply, even though demand remains strong. Or, in English, stocks go down when there are too many shares on the market and not enough demand for them.

Random musings: I have said it before, I will say it again: TheStreet.com's most valuable player is Herb Greenberg, who predicted that when Corel's (Nasdaq:CORL - news) CFO exited, this stock was about to crater. He got you out at 44. I love this guy. ... You want a great one? Check out the dice that EMC (NYSE:EMC - news) sent out as a Christmas gag. Every time you roll them they come out "buy" on one and "EMC" on the other. Except when "buy more" comes up. ... Thanks again to all of the input on the boards, now if only Gary B. Smith would do some charts for us on the supplementals. ... More Greenberg praise: His report card today is excellent. ... I can't believe I could jump back into Qualcomm (Nasdaq:QCOM - news) after missing 50 points, and make another $50! ... I see the next General Electric (NYSE:GE - news) , Internet Capital Group (Nasdaq:ICGE - news) , goes on Goldman Sachs' (NYSE:GS - news) buy list. What can I say?

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