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Before the year ends, we should see several red-hot IPOs hit the ever-exciting Nasdaq marketplace. One that will come to market is uBid. The company has already filed for an offering, which will be underwritten by Merrill Lynch. The IPO is expected to debut this week, with the proposed ticker symbol of UBID. The offering is relatively small: 1.58 million shares with a price range of $13 to $14. There are 8.9 million shares outstanding. The small number of shares should help boost the stock, since, as Adam Smith theorized, high demand and low supply lead to high prices. It's as simple as that.

But don't IPOs only go to institutional investors and wealthy individuals? In many cases, that is true. But online investment bank Wit Capital is offering its members uBid shares on a first come, first serve basis. Investing in Internet-company IPOs is not guaranteed. Look at the latest huge IPOs: theglobe.com and EarthWeb. Both had spectacular debuts, but since then, have undergone significant erosion in their stock prices.

Who is uBid?

UBid is a wholly owned subsidiary of Creative Computers (Nasdaq: MALL), a catalog retailer of computer products. Creative Computers will initially sell about 20 percent of uBid to the public. Next year, Creative Computers says it plans to divest the remaining 80 percent of uBid through a tax-free distribution to its existing shareholders.

As the name implies, uBid is an online auction company. It offers primarily close-out or refurbished computer products. The company started its auctions in December 1997. Since then, it has auctioned more than 138,000 products and registered more than 120,000 users. Repeat customers accounted for about 68 percent of all orders in the past three months.

The uBid site auctions merchandise from more than 100 vendors, including Apple, Dell, Gateway, HP, JVC, Panasonic, NEC, and Sony.

The Online Auction Market

According to a study by credit card company Visa, about 46 percent of all online users will make holiday purchases (about 48 percent will be in their pajamas). Another study, from New York-based Jupiter Communications, shows retail consumer purchases of goods and services over the Net will increase from $2.6 billion in 1997 to $37.5 billion in 2002. The biggest online shopping category is computers and consumer electronics, a market projected to grow from $836 million in 1997 to $10.5 billion by 2002.

uBid's Financials

The company showed a net loss of $3 million for the nine months ended September 1998. For that same period, sales were $24.1 million. But there is significant growth: In January, uBid had only $157,000 in revenue; by September, the company was generating $5.8 million in sales per month. In other words, the company is showing incredible momentum in sales growth. Gross profits, which is revenue minus the cost of merchandise, shipping, and net returns, were $1.9 million, or 8 percent gross margins, for the nine months. These are fairly slim, but as sales grow and costs stabilize, the margins should improve. Sales and marketing expenses during that time totaled $1.4 million, while R&D, including payroll for systems personnel, telecommunications charges and Web-hosting charges, added up to $694,000. The company's general and administrative expenses -- for credit card processing, warehousing, distribution, customer service, accounting, and executive compensation -- totaled $2.7 million.

Is uBid The Next eBay?

UBid faces intense competition from competitors such as Onsale, eBay, Yahoo Auctions, First Auction (owned by the Home Shopping Network), Surplus Auction (owned by Egghead.com), WebAuction (owned by MicroWarehouse), and Insight Auctions. But the fierce competition hasn't been much of a concern for investors in the hot IPO market. The latest online auction site to go public was eBay, and its performance has been amazing. The stock is up more than 700 percent since its September IPO. Many feel uBid will be the next eBay.

But there are major differences between eBay and uBid. First, eBay is a person-to-person auction site. That is, suppose you have something to sell -- such as artwork. For a fee, you can list this item on eBay and let other users bid on it. UBid is a business-to-person auction. Instead of a person selling items, uBid obtains merchandise from manufacturers.

This is a big difference. The reason is inventory risk. Here's why: Since uBid purchases products from manufacturers, it must store these products in its warehouse, which costs lots of money. Because the inventory is mostly composed of computer products, there is great risk of obsolescence, which can put pressure on margins.

There is another big difference: scale. EBay, with 1.2 million users, is much larger than uBid. Oh, another big difference: EBay is profitable. Last quarter, the company racked up $2 million in profits. But such differences don't necessarily mean much when it comes to Internet IPOs. Investors are likely to bid this stock into the stratosphere.

Commercial: Readers interested in IPOs may want to check out The Investor's Guide To New Issues: How To Profit From Initial Public Offerings, available in our bookstore.