Firms Duke It Out for Choice Spots in B2B E-Commerce Space
By Suzanne Galante
Staff Reporter
11/1/99 11:11 AM ET
SAN FRANCISCO -- Investors who bought shares of Amazon.com (AMZN:Nasdaq) in 1997 -- at what some regarded as lofty prices -- have since
reaped rich rewards. As an early entrant in consumer e-commerce, Amazon solidified a leading market share.
Now, Wall Street is hoping for a similar phenomenon in business-to-business e-commerce. The promise of B2B -- bringing companies closer to
their distributors, suppliers and customers on the Net, all while cutting costs -- is just starting to take root. By 2003, some $1.3 trillion worth of
business transactions will be done online, a 30-fold increase from $43 billion in 1998, and 10 times the projected market for online consumer
sales.
But unlike the consumer e-commerce industry, B2B has yet to produce clear leaders that will dominate the space and set the ground rules. And
experience suggests that the first movers have a decent shot to become to the B2B side of e-commerce what Amazon.com was to the consumer
side. That is, if investors are willing to withstand the risk.
"This is a green field," says Joseph Garner, director of research at Emerald Research. Emerald's parent company Emerald Asset
Management holds shares in VerticalNet (VERT:Nasdaq) and Safeguard Scientifics (SFE:NYSE).
At the same time, the sector is in "hypergrowth," says Alexander Cheung, senior portfolio manager of the Monument Internet Fund, which
holds shares of Commerce One (CMRC:Nasdaq) and VerticalNet.
Several young companies are seeing their revenue grow like ragweed. In the third quarter ended Sept. 30, e-commerce software and services
company Commerce One's revenue grew nearly 150% from the second quarter, to $10.4 million. Chemdex (CMDX:Nasdaq), a B2B Internet
community for the chemical industry, saw revenue grow nearly 200% to $8.5 million during the same period. VerticalNet, which runs more than 50
industry communities, rose 46% to $5.18 million. And Ariba's (ARBA:Nasdaq) revenue rose 44% to $17.1 million.
Businesses already do trillions of dollars of business with each other. With B2B, Company X can go to business portals like VerticalNet to buy
$500 million worth of medium corrugated cardboard boxes. A software company like Commerce One, meanwhile, will benefit from selling the
products and services to help these companies move supply chains onto the Internet.
The stocks have been outperforming the Nasdaq index and their counterparts in consumer e-commerce. Over the past two months, the Nasdaq is
just about flat and Amazon, considered an Internet bellwether, is up 11%. Meanwhile, Commerce One and VerticalNet have risen 230% and 50%,
respectively. Despite the strong gains, some say these companies are just at the very beginning of a steep incline in opportunity.
"Large institutions are slow, but once economies become apparent ... they develop a momentum of their own," says Eric Grover, vice president of
marketing at Greyrock Capital, a provider of debt capital to technology and venture stage companies. So once these stodgy industries start to
make the shift to the Internet, it will be a snowball effect, he says. About half of Greyrock's clients are in the B2B space. "If they don't, then they
become completely disadvantaged."
That momentum will likely pick up speed next year. "There's a big pent-up demand for new applications, but people have been reluctant, resistant
and cash-starved because they had to focus on Y2K," says Peter Pervere, CFO of Commerce One. Once Y2K issues are behind companies, one
of the first areas of spending will be e-commerce, he says.
The success of the companies isn't assured. Competition could come from established software companies like PeopleSoft (PSFT:Nasdaq) and
SAP (SAP:NYSE ADR), says Jim Callinan, portfolio manager of the RS Investment Management Emerging Growth fund, which holds Ariba and
BroadVision (BVSN:Nasdaq).
And not all companies trying to conquer the space will be a success, just as not all of the consumer e-commerce companies have thrived.
CDnow (CDNW:Nasdaq) is below its February 1998 IPO price of 16. Beyond.com (BYND:Nasdaq) (which went public as Software.net in June
1998 at 9 a share) is also under water.
And when missteps occur, the results can be ugly. Procurement product provider Concur Technologies (CNQR:Nasdaq) announced Oct. 5 that
revenue would miss expectations by about 30% for its fourth quarter. The stock, which closed as high as 55 earlier this year, closed Tuesday at
13 3/8, down 76%.
"It's a gazillion-dollar business," says Dan Drake, a portfolio manager at Talmor Capital, "but it all just looks expensive to me." Drake doesn't
hold any B2B stocks.
People said the same thing about Amazon in June 1997, back when it was 1/47 of its current price.
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