Internet e-Commerce Seen Boosting 3Q Tech Performance [ISLD reference]
worldfinancenet.com
Irv DeGraw
Research Director
7-13-99
The sharp growth in Internet e-Commerce is boosting the revenue and earnings
outlook for several Tech sectors in the 3Q. As a result, several investment
opportunities are emerging. Savy investors will want to be aware of these new
developments.
During 2Q'99 business to business (B2B) e-Commerce emerged as one of the
fastest growing Internet sectors. Formerly, this was the exclusive domain of
specialized Internet portals and a handful of large companies. But, spurred by
intense competition, mid-sized firms have entered the fray with a vengeance. They
are now the largest and fastest growing segment of B2B e-Commerce.
Because of the sheer number of mid-sized firms, demand for the components
needed to operate e-Commerce is skyrocketing. Early results suggest strong
benefits for 5 sectors which provide the tools needed to conduct e-Commerce. The
following sections highlight these sectors.
High End PC Makers
The fortunes of PC makers have been rejuvenated by this outbreak. Formerly, this
sector appeared locked into the lackluster world of consumer PC sales, with
slowing demand and plummeting margins. However, with e-Commerce the high end
"server" boxes take center stage. Not only are these servers more powerful, their
margins are considerably higher. So with strong demand for these high margined
servers, both earnings and stock prices should enjoy a stronger than expected 3Q.
Leading the list of prospective beneficiaries are: IBM, Sun Microsystems, and
Hewlett-Packard. Missing from this list are Compaq, which remains mired in
internal problems, and consumer oriented PC makers Dell & Gateway.
Web Site Development Consultants
Installing and maintaining e-Commerce facilities is an incredibly complex process
requiring superior levels of specialized technical skills. Few firms, whether small or
large, have the kinds of technical resources required to maintain web sites. Those
who try to "get by" will be quickly disillusioned. And anyone who has spent 3 hours
on the telephone waiting for a technical support response, and then only to hear
jibberish and finger pointing, will be very frustrated.
Smart firms will resort to the "pros" and will use consultants. But all consultants are
not created equal and there is a proliferation of marginal "mom & pop's" in the
industry. Mid-sized firms may also not be able to afford the large scale consultants
such as Andersen, EDS, Perot, etc. So we expect mid-range consulting firms with
strong reputations to be the primary beneficiaries of this trend. A partial list of
prospective candidates in this area includes: Proxicom (PXCM), Razorfish (RAZF),
Applied Theory (ATHY), Scient (SCNT), iXL Enterprises (IIXL), Viant (VIAN), and
AppNet Systems (APNT).
e-Commerce Software
Several firms providing B2B e-Commerce software are just beginning to emerge.
Only those providing fully integrated development tools, site maintenance, customer
tracking, ordering, payment processing will be the leading investment candidates. A
partial list of prospective candidates in this area includes: Silknet Software (SILK),
Usinternetworking (USIX), Portal Software (PRSF), Vignette (VIGN),
Commerce One (CMRC), Persistence Software (PRSW), and CyberSource
(CYBS).
Web Hosting Services
These services maintain and manage network access to e-Commerce web sites,
another specialized and technically demanding skill set. Again, most mid-sized
companies lack the resources needed to run a site 24 hours a day, 7 days a week
(i.e., 24/7). From direct experience, we've also found that the quality of many of
these hosting services is marginal. Since no serious B2B e-Commerce firm can risk
downtime, which is the same as "closing the doors", only those firms with the
strongest reliability reputations should be considered as investment candidates. A
partial list of prospective candidates in this area includes: Digital Island (ISLD) and
Interliant (INIT).
The explosion of B2B e-Commerce among mid-sized companies represents a
potential for many firms in the 3Q. This bonanza should also translate into above
average stock performance as well. Consequently, well-prepared investors may have
an opportunity to share in the benefits of this unique event.
NOTE: This review is presented for industry background information only. It is meant
to highlight an industry development so investors can examine it further. It is not a
recommendation for specific stocks. Nor is it an endorsement of any firm's products
or services. Investment decisions should only be made after carefully reviewing each
company's specific information and annual reports.
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