Stock of the Day
Sep 15, 1999
Commerce One: The eBay for Business Transactions
by Garrett Bekker 9/15/99
Shares of Commerce One (NASDAQ:CMRC - news) have been on the rise, gaining $7.12,
or nearly 11% on Monday alone. This capped a two-week rally during which its price rose
by 65%.
Unlike other recent 'Net-IPOs, the business-to-business (B2B) e-commerce enabler, which
went public during the summer, is keeping its head above water. At $74.50, it is comfortably above its opening day closing
price of $61.
Why the recent runup? Investors are finally starting to notice the staggering potential of this new crop of B2B intermediaries.
Although B2B e-commerce receives much less attention than its business-to-consumer brethren such as eBay
(NASDAQ:EBAY - news) , B2B e-commerce already generates about ten times as much revenue. Forrester Research
expects B2B e-commerce to reach $1.3 trillion by 2003, compared to $108 million for B2C e-commerce.
And Commerce One is well positioned to reap the benefits. Commerce One is based on an entirely new business model known
as an "e-commerce hub," or "e-commerce portal." Similar to what eBay has done for consumers, the basic idea is to leverage
the power of the Internet to aggregate huge numbers of business buyers and sellers.
Commerce One is focusing on business procurement, an area which has so far been overlooked by traditional enterprise
software companies, which have tended to focus on automating and managing the supply chain for manufactured goods.
Procurement involves the purchase of operating resources necessary to run a firm, and includes such items as office supplies, IT
supplies, T&E (travel and expense management), MRO (maintenance, repair and operations), and services (legal services,
etc.). Procurement is thought to be the largest market opportunity within B2B. While only manufacturing companies need to
manage their supply chain, all companies need to procure operating resources.
And also like eBay, network effects are powerful. The more buyers you have, the more sellers you can attract, and vice-versa,
forming a virtuous cycle that can accelerate revenue growth at a frightening pace.
Network effects also create enormous barriers to entry and "lock-in," since sellers will want to be where the buyers are, and
vice-versa. Such markets tend to "tip" in favor of one company when that company reaches critical mass. And when that
happens, game over.
Thus an important metric to keep an eye on will be the number of sellers and buyers in the network.
The comparisons to eBay end, however, when connectivity is considered. For eBay, users merely need a PC and a Web
browser to participate in online auctions. Not so for firms engaged in B2B e-commerce.
The task of connecting an army of business users is formidable, since interoperability requires integration into suppliers' and
buyers' existing IT systems, which utilize different platforms and are written in various programming languages.
Accordingly, the infrastructure requirements of such a task are monumental. Traditional ERP providers have relied on electronic
data interchange (EDI) systems, which establish point-to-point connections among participants.
The hub-and-spoke architecture utilized by Commerce One has several advantages. First of all, suppliers only have to post
their catalogs once, in one standardized format, which is then transmitted to the network of buyers via the hub. Without the hub,
suppliers would have to reformat their catalogs and content according to each buyer's configuration requirements. Additionally,
it allows for centralized control and administration of the network.
Will the established ERP vendors such as Oracle (NASDAQ:ORCL - news) and SAP (NASDAQ:SAP - news) move in and
crush start-ups like Commerce One? Both companies have already begun developing their own products.
However, one potential hurdle that they will have to clear is their reputation for extremely expensive and time-consuming
projects. Commerce One's reliance upon XML (extensible markup language) and Web-based architecture will allow for lower
cost and much more rapid deployment.
At $71, this stock is not cheap, trading at 42 times projected sales for 2000. However, there is little analyst coverage on the
street.
Once the analysts start pouring in, the stock could move explosively, much like eBay did in the B2C space. Just for
perspective, eBay trades at 65 times 2000 sales forecasts.
Bottom Line:
Like all Internet stocks, Commerce One is risky, and not for the faint-hearted. The game is still early, and thus it is difficult to
pick who the ultimate winners will be. Those who are interested in the stock might also take a look at close rivals Ariba and
Concur (NASDAQ:CNQR - news) .
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