thestreet.com. Move Over Y2K, B2B Is Here (CMDX reference)
COMMENTARY >> SILICONSTREET.COM
By Adam Lashinsky
Silicon Valley Columnist
9/17/99 7:00 AM ET
Business-to-business e-commerce now officially is the Next
Big Thing. Why? Because Goldman Sachs says so in a
report it issued Thursday. 'Nuff said. Pay attention, though,
to the details beneath the hype. They suggest it also is
going to be the Next Big Disruption for tech-stock investors
who get caught crosswise of the euphoria.
B2B, as the smart set calls it (yes, you're going to hear this
every bit as much as Y2K), indeed is going to be big.
Goldman's analysts estimate overall B2B industry revenue of
$1.5 trillion by 2004. This means that revenue associated
with commerce conducted over the Internet between and
among businesses, as opposed to consumers, will grow
more than 10-fold from an estimated $115 billion this year.
A few potential B2B problems bubbled to the surface,
however, for those who listened carefully to Goldman's
conference call with institutional investors immediately
before its teleconference with reporters.
See, Goldman wants to hype B2B e-commerce because
right now there are precious few publicly traded B2B stocks,
a short list that includes Ariba (ARBA:Nasdaq), VerticalNet
(VERT:Nasdaq), Commerce One (CMRC:Nasdaq),
IntraWare (ITRA:Nasdaq), Internet Capital Group
(ICGE:Nasdaq), pcOrder.com (PCOR:Nasdaq), Chemdex
(CMDX:Nasdaq) and Healtheon (HLTH:Nasdaq). The
combined revenue over the last year of those fledgling
companies is just over $200 million, about 3 1/2 days worth
of sales for Dell Computer (DELL:Nasdaq). If industry sales
really are to explode within five years, there'll be tons of
upstarts for Goldman to take public (see below).
The catch is that Goldman's hot-shot Internet analyst
Rakesh Sood and veteran software guru Richard Sherlund
dutifully point out the risks with B2B. For credibility, they
must. Presumably, they're also beginning to establish the
difference between a Goldman client and everyone else.
For one thing, it's a given that scores of inferior B2B
companies will try to sneak through the IPO process along
with the good ones. Business-to-consumer offerings started
as a trickle before the floodgates opened this year. B2B
stocks will skip quickly to the overkill stage. "We have to
beware of the hype," says Sood.
The six-analyst Goldman report is more specific: "Regarding
stock recommendations -- we believe that there will be a
number of beneficiaries, but fewer long-term winners."
Remember that when scrutinizing a specific IPO candidate
being brought public by Goldman or one of its competitors.
Sood also touches indirectly on one of the fundamental
problems of B2B: Automating slim-margined businesses
creates automated slim-margined businesses -- not instant
technology companies. He speaks of B2B companies having
a "revenue blend." Translation: Many B2B companies won't
be particularly profitable on most of what they do, even if
they are extraordinarily profitable in some part of the
business.
Sherlund is more specific. He notes, with envy, that the best
of the companies Sood follows typically trade at 20 or 30
times their revenue. In contrast, Sherlund's top picks fetch a
meager 50 to 60 times earnings. As established enterprise
software companies like Oracle (ORCL:Nasdaq) and SAP
(SAP:NYSE) gun for Internet-type valuations, they'll have to
tear up their business models and start from scratch. And
that, says Sherlund, will make for a difficult transition for
many. He predicts more older companies will consider
issuing tracking stocks for their B2B efforts and that the
clashes between entrenched players and the "dozens" of
startups will be tumultuous.
Another usually unspoken truth about the new crop of B2B
stars is that they're actually software companies
masquerading as Internet concerns. Unless a company has
predictable, recurring revenue streams, like B2B standouts
Yahoo! (YHOO:Nasdaq) or America Online (AOL:NYSE),
it's just another enterprise software company, albeit in a new
niche. This is relevant because software makers that make
big-ticket sales to a handful of customers are famously
susceptible to end-of-quarter deals that yield the dreaded
hockey-stick sales curve. Back-end loaded quarters make
for poor visibility, which makes for volatility in the stock.
Says Sherlund: "You don't want to pay 20 to 30 times
revenue if you're unsure if they're going to make the quarter."
Adam Lashinsky's column appears Mondays, Wednesdays
and Fridays. In keeping with TSC's editorial policy, he
doesn't own or short individual stocks, although he owns
stock in TheStreet.com. He also doesn't invest in hedge
funds or other private investment partnerships. Lashinsky
writes a column for Fortune called the Wired Investor, and is
a frequent commentator on public radio's Marketplace
program. He welcomes your feedback at
alashinsky@thestreet.com.
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