DIAMONDS MAY BE

forever, but on

Bidz.com

Bidz is the creation of Chief Executive David Zinberg, an immigrant from Moldova who took his first job in the U.S. in a shoe store. He went on to form a business selling jewelry on eBay and parlayed that into what is now Bidz.com, a roughly $400 million company whose stock has risen 125% since its May initial public offering. In August, Zinberg decided to forgo his annual salary and receive a nominal $1 a year, with no stock options or bonus, saying the move more closely ties his pay to the company's performance. The CEO owns close to three million shares of the company.

"A lot of people are looking to copy us and watching what we're doing," Zinberg says. "But we're an innovative company and doing things differently, so you can expect new things to come."

So far, the Culver City, Calif., company is dazzling Wall Street with its solid financial performance. For the third quarter, Bidz earned $3.6 million, or 14 cents a share, up from four cents a year earlier. Revenue rose 48% to $40.1 million.

What sets Bidz apart is its unique, if somewhat addictive, live auction process. Unlike eBay, which cuts off bidding at a preset deadline, on Bidz it isn't over until it's over. An auction for a gold bracelet, for instance, will be open for at least one hour. But bidders, who must register with the site, can prolong the auction if they put in a bid in the final seconds before the auction closes. If a bid comes in, the auction goes for another 15 seconds, and so on, until no other bids are made. Whoever wins the bid gets to hear their national anthem play on the site. (About 24% of sales come from customers outside the U.S.)

Bidz uses its own, internally developed software to run the auctions, with most auctions lasting for about one hour, giving shoppers immediate gratification after the thrill of the bargain hunt. However, winning bidders aren't committed to buying if they change their mind. Customers don't provide any credit-card information to register and aren't penalized if they decide not to buy an item they win.

"The jewelry market is really fragmented," says Mark Argento, an analyst at Craig-Hallum. "On the high end you have Blue Nile, on the low end there is an opportunity and I think Bidz is really coming in and seizing that."

Despite its early stock run, Bidz shares are still cheaper than peers' at 36 times expected earnings for 2008. Analysts forecast long-term earnings growth of 47%, according to Thomson Financial. By that measure, Bidz trades at a more than 40% discount to the S&P 500.

In comparison, Bidz's main competitor, upscale online jeweler Blue Nile, trades at 56 times forward earnings, with analysts forecasting long-term growth of 24%. EBay trades at nearly 20 times forward earnings and is seen growing 19% over the long term.

The main risk to Bidz's business is that it depends on having a constant and wide variety of jewelry that it can sell at a discount, and it doesn't have any guaranteed source. Last quarter, Bidz's top two suppliers accounted for 17% of its purchases.

But the company has found a way to make it worthwhile for jewelry makers to be suppliers. Bidz buys its baubles from manufacturers, wholesalers and retailers trying to get rid of unsold inventory, a process that has traditionally meant returning jewelry to the original manufacturer and melting it down for parts. "Until Bidz arrived on the scene, the liquidation process was often a cumbersome and unprofitable experience for suppliers," Roth Capital Partners analyst Elizabeth Pierce said in a research note on Sept. 28.

Michael Berry, an analyst who covers Bidz for Greenville Capital Management, which is a top holder of the stock, says the Street is just starting to catch on to the company. "More people are starting to see the value proposition they offer to clients and their ability to keep clients coming back," Berry says.

Bidz attracted about 55,000 new buyers during the third quarter. About 2,700 orders were placed daily, with the average order amounting to $173, up 40% from $124 a year earlier. The company said it's keeping expenses down and margins up by co-opting marketing and holding shipping promotions to a minimum.

Indeed, one of the benefits to Bidz owning the merchandise it auctions is that Bidz is able to have a relatively friendly return policy. Customers, the majority of whom are women, can return any item for a full refund if it's different than advertised, by objective standards, such as a bracelet described as being seven inches long is actually five inches long. Otherwise, customers can get a refund minus a 15% re-stocking fee.

Going forward, Bidz has several growth drivers on the horizon. It is expanding into different foreign languages, with a Spanish site debuting in the first quarter, and plans for German, Chinese and Japanese sites. Bidz is also launching an online store in the first quarter, Buyz.com, which won't be an auction site. Zinberg says it will carry jewels "from $1 to $1 million" and let customers design some of their own jewelry. As a marketing tactic, the new site will allow Bidz to advertise with sites such as Bizrate and Froogle, which it can't currently do as an auction company because Bidz.com doesn't have fixed prices.

There is a chance that another online jewelry auction site will emerge as a serious competitor. But Zinberg points to online book retailer Amazon.com as a reason why he doesn't see that happening. "The Internet doesn't need many second-rate companies, just one best one," he says.

If Zinberg is right, Bidz could prove a true diamond in the rough for investors looking to add some luster to their portfolios.