FRAMINGHAM (06/30/2000) - One weeks ago, on the day an analyst at Lehman Brothers Holdings Inc. called Amazon.com Inc.'s [Nasdaq:AMZN] credit "weak and deteriorating," its stock plummeted 19%.
Around that time, San Francisco-based PlanetRx.com Inc. [Nasdaq:PLRX] lowered its second-quarter earnings projections by $2 million, causing analysts to question its viability.
But PlanetRx has traditionally had a strong presence in its market, second only to Bellevue, Washington-based Drugstore.com Inc. [Nasdaq:DSCM]. And Seattle-based Amazon.com is the leader in its market.
So why are these companies shuddering in the wake of analysts' reports?
Investors in online-only operations demand higher profits in less time than they do from traditional companies, says Mark Miller, an equity analyst at William Blair & Co. in Chicago.
Another problem is that young companies are still trying to figure out the market and how to sell online, says Steve Weinstein, vice president of research analysts at Pacific Crest Securities in Portland, Oregon.
"Expectations do get ahead of reality," he says. "When looking at a company that's only a year old, you can't expect them to do everything right." Online businesses and brick-and-mortar companies can't be evaluated with the same guidelines, because they're two different business models, Weinstein says.
Online businesses seem to be a stronger investment, he says, because they can reach a wide market without investing time and money in brick-and-mortar infrastructures. However, Weinstein adds, the trade-off is that they're often unstable.
But Sara Farley, an e-commerce analyst at New York-based PaineWebber Inc., says both types of business should be held to the same standards because both business models are concerned with profitability and viability.
One remedy to many of the recent woes of online companies is to partner with traditional businesses, the way Drugstore.com did with Rite Aid Corp.
[NYSE:RAD] and General Nutrition Cos., says Tom Wyman, an analyst at New York-based J. P. Morgan & Co.
"I think that investors are increasingly looking at the models of business, and increasing profitability is the main concern," Farley says.