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Newegg finally goes public, with financial analysts expecting big things

Online retailer Newegg today announced plans to go public, filing for a $175 million IPO, according to an SEC filing.

Newegg is best known as a technology e-tailer, but has expanded of late to include other consumer electronics.  Since launching in 2001, the company has been profitable every year, with $2.1 billion in sales in 2008.  In 2007, the company saw $1.9 billion in sales, with the number expected to increase as Newegg expands its business.

The company has seen dramatic success after making changes to support small- and medium-sized businesses in the United States.  Newegg also has its sights outside the United States, with China expected to be an important step in the company's continued expansion.  Furthermore, Canada also is expected to be a big market for Newegg, with many Canadians long requesting to be able to make purchases from the site.

The company does have to deal with several issues in the immediate future, including a patent infringement lawsuit filed by Soverain Software, according to the IPO registration filing.  If Soverain is successful in getting an injunction against Newegg, the company may be forced to "stop or alter certain of our business activities."

In the future, Circuit City -- although its physical stores went bankrupt, a liquidator purchased the company's online business and keeps it running -- will lead the charge of online businesses that aim to derail Newegg.

The IPO will be handled by Citi, JP Morgan, and the Bank of America, with Newegg's largest shareholder, Insight Venture Partners, also completing another IPO earlier in the year.



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mixed feelings
By MadMan007 on 9/28/2009 4:15:56 PM , Rating: 5
Not that it matters too much to me whether a company I do business with is public or private but one advantage private companies have is they don' have to answer to shareholders or whatever expectations Wall Street has set. Newegg does have a great reputation for the most part as an etailer, especially in regards to customer service, I just hope they can keep it up with external shareholder and Wall Street pressure.




RE: mixed feelings
By TomZ on 9/28/2009 4:37:29 PM , Rating: 3
That's a really good point, and I kind of shudder when I hear news of Newegg doing an IPO for the same reason.

I also wonder why they are doing an IPO at all. Clearly $175M is not much compared to their overall sales, so it probably isn't about them needing that cash for some purpose. They must intend to sell a lot more stock in the future to finance an overall larger growth strategy.


RE: mixed feelings
By omnicronx on 9/28/2009 5:34:28 PM , Rating: 5
Thats 2 billion sales, not profit. I hear their margins are super slim, something like 1.5%, so doing the math 1.5% of 2 billion = 30 million. Looking at it this way, 175 million may be too much.


RE: mixed feelings
By GeorgeH on 9/28/2009 6:25:58 PM , Rating: 5
Very close; the exact numbers (2008) are 1.4% and 28.8m:

http://www.techcrunch.com/2009/09/28/neweggs-ipo-f...


RE: mixed feelings
By MadMan007 on 9/28/2009 8:57:00 PM , Rating: 2
Thanks for the info. It looks like etailing is a tough business even for premium name companies.


RE: mixed feelings
By Cypherdude1 on 9/29/2009 11:53:56 AM , Rating: 2
quote:
one advantage private companies have is they don' have to answer to shareholders or whatever expectations Wall Street has set

I agree. The first thought I had when I read this was, "there goes Newegg." Public companies must answer to Wall Street and they must show a profit every year. When a company loses money, their stock get hammered. Expect to see marked changes in the near future. I suspect these changes will include less selection due to their dropping items which don't sell as well, higher prices, stricter return policies, fewer personnel, and less phone contacts. It looks like we're going to have to read the fine print before we buy from Newegg now.


RE: mixed feelings
By kmmatney on 9/29/2009 2:18:53 PM , Rating: 2
Not only do they have to show profit, but they have to show that profit is increasing each year. They can make $25M profit in a year, and still look bad and have the stock go down. I don't see this as a good thing - I'm thinking some of the higher ups just want a big payday. That's what happened with my company after going public - a few higher ups became millionaires, while the company went bankrupt several years later.


RE: mixed feelings
By astralsolace on 9/30/2009 1:27:11 PM , Rating: 3
That's not true.. What happens is that when a company doesn't meet the industry analysts' expectations, people re-evaluate their investments.

If a company is reliably profitable, even if they're not increasing their profits by huge amounts each year (except for inflation), then their stock will still be worth owning.

Companies with stable/reliable profits, but without expansion usually send their profits back to the shareholders, i.e. dividends. They're called value stocks.


RE: mixed feelings
By JKflipflop98 on 10/6/2009 5:58:22 PM , Rating: 2
You are obviously correct. However the real issue here is that the newegg that we all know and love is going to tear itself to peices trying to keep that "constant expansion" image going.

Less staff, more hours for the ones that stay, higher prices, stricter return policy, and many other wonders of our capitalistic regime will be implanted upon them.

In short, they just took away all the reasons people love Newegg. The IPO is going to kill them.


RE: mixed feelings
By afkrotch on 9/30/2009 5:25:09 AM , Rating: 2
It's only tough, when you try to provide customers with low prices. With going public, the possibilities of increased prices for increased profit looms in the distance.

I fear I may need to move elsewhere to continue getting good prices on my electronic purchases.


RE: mixed feelings
By rs1 on 9/28/2009 6:30:02 PM , Rating: 2
I want to know the number of shares involved in the IPO. Given their current EPS of $0.34, that should make $10-$12 a reasonable target price (assuming a 30-40 P/E ratio...if it gets the ridiculous 60+ that Amazon currently has, then maybe $20 isn't out of the picture). That would mean that they'd need to offer at least 17.5 million shares for it to be smart to buy into the IPO. Fewer than that, and the IPO share price may be too high.

Somewhat interesting, considering that there are currently only about 63 million shares in existence. Is it typically for companies to offer up ~28% of their shares in their IPO? That number seems a bit high, all things considered.


RE: mixed feelings
By ChristopherO on 9/28/2009 7:52:55 PM , Rating: 2
You guys are also forgetting something. Debt. They can increase margins somewhat by retiring debt (which they don't seem to have too much). It also wouldn't surprise me if they relocate out of California with the IPO proceeds. It is insane to run a business in this state, especially one that's in the warehousing or distribution business. Just going to Nevada would save them a fortune.

That would trim their tax burden quite a bit, plus labor expenses would fall. You need to remember, Amazon makes such great margins because they build warehouses in an intelligent manner. Typically in low-tax states located directly next to a major UPS shipping hub.


RE: mixed feelings
By MadMan007 on 9/28/2009 8:54:26 PM , Rating: 2
I'm actually curious how Amazon gets around charging sales tax in states where they 'have a warehouse.' Are the warehouses subcontracted somehow?


RE: mixed feelings
By rs1 on 9/28/2009 9:30:15 PM , Rating: 2
Maybe they do it the same way Xotic PC does, by shipping the order first to an out-of-state warehouse, and then shipping from that warehouse to the customer.

quote:
For Sager Orders where the customer resides in California, Xotic PC will cover the added shipping expense to have your machine sent into our Nebraska facility to avoid California Taxes (by default). If a customer prefers to pay the California Tax, this can be set up by request.


RE: mixed feelings
By MadMan007 on 9/28/2009 10:38:20 PM , Rating: 3
Well that's an idea but I know they don't do that because I've ordered stuff from Amazon direct, not an associate store, and the return address is in my state but no sales tax. I'm not certain whether their warehouses are some sort of colocated distribution company where multiple companies fulfill orders, or maybe a company solely to fulfill Amazon orders but I know they don't do any shipping trickery.

I'm surprised that place you mentioned is willing to risk their business by doing that since they have facilities in California either way it sounds very shady.


RE: mixed feelings
By an0dize on 9/29/2009 9:14:05 AM , Rating: 1
You know you still actually owe those taxes to the IRS right?


RE: mixed feelings
By nafhan on 9/29/2009 9:44:34 AM , Rating: 2
Yes, and I'm sure he goes through pays them each year when he does his taxes, just like you and everyone else on the dailytech forums...


RE: mixed feelings
By mattclary on 9/29/2009 10:52:09 AM , Rating: 3
IRS does not deal in sales tax. Sales taxes are state, not fed. But, you are supposed to pay them to the state. Sales taxes are on the purchase, not the sale, so the buyer owes them. It's just a nifty way for the govt to double dip, since the sale is already taxable as income for the seller.


RE: mixed feelings
By erple2 on 9/29/2009 11:41:56 AM , Rating: 2
The only rule I know of is that the federal government isn't allowed to double dip for any given taxpayer. State taxes can (and do) more or less whatever they want with their tax codes.


RE: mixed feelings
By ChristopherO on 9/29/2009 1:54:20 PM , Rating: 3
You're forgetting there is a federal gas tax, which is based on income you've already paid taxes on. Anyone can double-dip in any way they want. That's why VAT is so creepy. A new way to triple-dip without the consumer knowing, since the vendor pays the tax on *your* behalf.

I think withholding should be outlawed. Force everyone to send their taxes in every month... You do that, and there would be rioting in the streets over punitive taxation. It's amazing how a government can totally hose a person when they're unaware of it.


RE: mixed feelings
By afkrotch on 9/30/2009 5:35:32 AM , Rating: 2
Tax is all kinds of crazy.

Business A sells items gains revenue. Their revenue is taxed.
Part of the revenue is given to employees as income. It is taxed.
Employee buys goods/services with their income. They are taxed.

At least that's how I see it going on. Maybe the revenue isn't taxed and only profit is taxed.


RE: mixed feelings
By lightfoot on 9/30/2009 2:44:20 PM , Rating: 2
Only profit is taxed for businesses in the US, but they then spend that profit either in dividends to share holders (which is taxed again as capital gains) or they use it to invest in their company (which is taxed when they buy improvements or new equipment.)

Due to the tax laws of this country, the biggest competitive advantage a company can get is to be operating under bankrupcy protection. It's practically a business model in the airline industry.


RE: mixed feelings
By ChristopherO on 9/29/2009 1:50:02 PM , Rating: 3
quote:
Are the warehouses subcontracted somehow?

Some are. They are direct shipped from some of their distributors. The transaction is basically, "Here Ingram, you need to send a book to this guy over here, we don't care how you do it." That's why some Amazon labels are fairly inconsistent. Inconsistent label-stock is usually a giveaway that it's an outsourced warehouse.

Technically most states require you to pay sales tax on all Internet transactions. You typically need to declare the amount on your yearly tax forms. However, the state would never know unless they subpoena every e-tailer for your records to discover the shipping address for your orders. I think it's one of those gray areas that the US Supreme Court hasn't addressed unambiguously (but seems to side with the states).

I pay the tax because I buy enough things on line that if I ever got audited it would be an obvious problem... Especially since Turbo Tax has a large screen that asks, "Did you buy anything on the Internet?" Pretty hard to claim ignorance when the state already knows you e-filed via Turbo Tax.

Amazon is my favorite store, but in fairness to the states, Amazon does sort of rely on people skipping these taxes. If anything it only seems fair to tax the origination state, and not the destination... That would also encourage states to offer tax-incentives to lure new companies.

The tax system is so backwards it makes me ill.


RE: mixed feelings
By peritusONE on 9/30/2009 1:13:07 PM , Rating: 2
quote:
I'm actually curious how Amazon gets around charging sales tax in states where they 'have a warehouse.' Are the warehouses subcontracted somehow?


I'm in one of very few states with an Amazon warehouse, and I always get charged state tax at the time of purchase. I actually even worked at one of the two warehouses in my state a few years ago.


RE: mixed feelings
By inperfectdarkness on 9/29/2009 11:37:38 AM , Rating: 3
they'll start operating for shareholders. the prices will skyrocket, the service will suffer, and eventually--they'll turn into another tiger direct.

fortunately, the cycle of life will keep renewing itself. another private upstart will start selling things--without having shareholders to answer to. i've loved new egg, and i will love whomever succeeds it after the IPO burns the soul out of the company.


RE: mixed feelings
By callmeroy on 9/29/2009 2:40:48 PM , Rating: 2
ugh tiger direct....personally for me my worse "customer-to-business" experience in my life thus far.....

this was back many years ago before most people even heard of them though, so maybe they have improved since then...


RE: mixed feelings
By bighairycamel on 9/28/2009 6:39:54 PM , Rating: 3
I'm with you. With new pressure to increase profit margins year after year, I just hope their executives are creative enough to think of ways to stimulate growth rather than just raise prices, raise prices, raise prices.


RE: mixed feelings
By ExarKun333 on 9/29/2009 8:57:45 AM , Rating: 2
Yeah, because making a profit year after year isn't good enough for some reason. Profit margin doesn't have to increase year after year if you are making good money. Shareholders can go to h@ll...


RE: mixed feelings
By TomZ on 9/29/2009 9:00:43 AM , Rating: 2
The profit margin % doesn't have to grow - just the absolute (total) profit has to grow. So if they are growing their sales revenue and holding profit margins, that will make investors happy.


RE: mixed feelings
By KoolAidMan1 on 9/28/2009 7:02:48 PM , Rating: 2
Hopefully they will do as Amazon has done and actually improved in terms of customer service and prices as they have grown to be more successful, same with other big retailers like Costco.

Actually, one place where I find Amazon to be superior is that all return shipping fees on defective merchandise is covered by them, while with Newegg all return shipping is covered by the customer. Well, that and the whole "no 10% sales tax in CA" thing is another big positive for Amazon.

Either way, hopefully Newegg continues to get better. I personally think that their raw selection is their biggest advantage; for high tech goods nobody can touch the amount of stuff that they carry. Their prices are good but I can also find comparable or better prices from Amazon or MWave (and with Amazon I skip 10% sales tax and get unlimited 2-day shipping for $80 a year). I think Newegg actually has a little ways to go to match Amazon or other retailers in terms of customer service, their website can keep getting better, etc etc. Hopefully this IPO doesn't get in the way of them doing that.


RE: mixed feelings
By Mojo the Monkey on 9/29/2009 2:34:13 PM , Rating: 2
All hail costco for their ridiculously good customer service, no-questions return policy (takes the place of a warranty most times, unbelievable) and excellent pay for their employees (considering the work). One of the few major corps I like.


RE: mixed feelings
By burpnrun on 9/28/2009 9:40:49 PM , Rating: 2
Note that there is NO mention in the release that they will actually open a Canadian distribution centre. Their shipping costs from the U.S. warehouses are still exorbitant, Also, it's always much cheaper to price-match with NCIX to get the same price if NE is lower (increasingly less so), there's no PST if one is outside NCIX's BC distribution point, and the goods arrive much sooner from NCIX.

BUY CANADIAN. NewEgg is US. Turn the tables on them!


RE: mixed feelings
By Gannon on 9/29/2009 4:46:32 AM , Rating: 2
Newegg is irrelevant to those of us who know about NCIX.

I've never found bettter prices @ newegg, while newegg may have more selection of some items, newegg's prices still can't compete with NCIX, and where NCIX is more expensive, NCIX is almost ALWAYS willing to match prices of competitors.


RE: mixed feelings
By omnicronx on 9/29/2009 4:34:39 PM , Rating: 2
Ncix will pricematch pretty much anything on the Canadian Newegg site. As long as it is in stock that is.. I've pricematched a good 15 things since the Newegg site opened.

That being said, their prices have risen over the years, and I have found myself just going to one of the tigerdirect/canada computers retail stores in my area, as the money I was saving at Ncix was offset by the shipping costs.. The fact that I can go into the store and get the product I want right away is always appealing too..


RE: mixed feelings
By pnyffeler on 9/29/2009 12:08:16 PM , Rating: 2
While everybody on this site is worried about how NewEgg will change and how it will affect them, I tip my cap to the folks who built such an awesome company from the ground up. They put in all the hard work, and now they're about to be rewarded.

For anybody who's ever had the guts to go out on a limb to start a company of their own, this is the dream. Now, if they're really smart, they'll cash in and get out before they face the sad realization that they don't run the company anymore....


"If you look at the last five years, if you look at what major innovations have occurred in computing technology, every single one of them came from AMD. Not a single innovation came from Intel." -- AMD CEO Hector Ruiz in 2007

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