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Stock of the Day
Feb 18, 2000
Aspect Development: Presto, It's an E-Commerce Play
Analyst: Dave Peltier (2/18/00)
Aspect Development (NASDAQ:ASDV - news) may have gotten knocked for a loss on Thursday, dropping $5.63 to $110, but the stock is still up roughly 80% for February alone.
In fact, Thursday?s bumps and bruises followed Wednesday?s tremendous rally, when the stock gained $15.63 to $115.63 in the wake of the company? s announcement of a 2-for-1 split.
At any rate, the run in this stock is far from over, and we still like the company?s future prospects.
Up until six months ago, the company was saddled with the dreary identify of being little more than an enterprise software provider. Its stock was mired in the low $20s.
Then this enterprise software caterpillar began a transformation into an e-commerce butterfly, and the shares took off.
In August, Aspect announced a deal with Ariba Inc. (NASDAQ:ARBA - news) . The two companies agreed to jointly develop business-to-business e-commerce systems for mutual clients. A month later, the stock began a steady climb
By January, the stock had made its way up to $60, where it was sitting two weeks ago. Then, life quickly got even more interesting.
On February 8, Aspect announced agreements with Commerce One (NASDAQ:CMRC - news) and iTwo (NASDAQ:ITWO - news) . Both of the B2B superstars said they would resell Aspect?s software to their clients via their e-commerce markets. Overnight, the sleepy little developer of supply chain management software was transformed into a "B2B e-commerce infrastructure player.?
Aspect says that its eMarket software will let it play a defining role in the next generation of B2B, which goes beyond automating the transaction process. According to chief executive Romesh Wadhwani, Aspect delivers "large value and differentiation by enabling content management, spend aggregation and design collaboration across an entire trading network of many buyers and suppliers."
In other words, Aspect's technology, by monitoring the level of inventory in a company?s warehouse and factories, tells it not only when to buy and sell, but the quantity it needs of each part and where it can get it. This will add value to existing processes and open up trading partnerships between more companies by linking them through the Internet.
Last June, Aspect launched Infinite Supply, a catalog of well over 10 million components and 6,500 suppliers that provides the data accessible to customers through the B2B portals. The Infinite Supply unit is the muscle behind Aspect?s eMarket software and worth at least $600 million.
As good as Aspect's technology is, it could be replicated in the market fairly quickly. The real barrier to entry for potential competitors though, is the catalog and the company's early ties to the largest market enablers. With the sheer depth of Infinite Supply, Aspect will be able to create more value for its customers by guaranteeing that they see all the major competitive quotes available.
Aspect will not cease to make its previously successful supply-chain management software, although it will encourage its customers to move toward Web-based versions.
Management?s announcement of the stock split on Wednesday is a sign of its confidence that the momentum can continue. Barring a major implosion of the markets, the stock stands to appreciate leading up to the March 13 ex-dividend date.
Aspect already has gross margins in the 80% to 85% range, and with a Web-based model should be able to raise that figure to 90%.
The company generates enough cash that it has never dipped into the secondary or debt markets. It has a buck per share on the balance sheet, but it also has the mobility to use its new lofty multiple to raise cash for future expenditures.
With Aspect however, we advise those with heart problems not to look at the P/E anymore. In good times as a software company Aspect traded around 50 times current earnings. But the new e-commerce business model affords it a current P/E ratio of 216.
The soaring earnings multiple reflects the company?s new guise as a B2B player. In fact, a better method of valuing the stock may be found in its forward revenue multiple.
On that measure, Aspect is trading at 17.8 times projected current year sales of $142 million and 12.5 times 2001 revenue. The revenue multiple is based upon the company?s core business and doesn?t include the value of its Infinite Supply business.
If anything, these revenue multiples are a discount to some of the highest priced B2B stocks. But Aspect is not a B2B pure play, given its roots in supply chain management software, and so it?s natural for the market to discount its stock slightly.
But investors should remember that the company already does operate at a profit, unlike most of the other B2B players.
Bottom Line:
Aspect was a good solid company before it became identified with the B2B craze, and its recent partnerships and solid products validate the steps it has taken to become a B2B presence.
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