1999.11.30 FreeMarket IPO, Better Than eBay, We Think So
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I've waited 3 years for business-to-business auctions to hit Wall Street. 3
long years for companies to realize that the B2B side of the auction space
is perhaps 100x that of eBay's brightest antique auction bonanza or
Pokemon/Beanie Baby/Furby-induced sale.
FreeMarket could be it, or one of them. FreeMarket is what VerticalNet
(VERT) wanted to be but missed out on with its content approach. FreeMarket
is commerce baby. Ecommerce in heavy doses, eBay on steroids once the
Fortune 500 adopt this sort of platform (if they do).
IPO expected the week of December 5 through Goldman Sachs and Morgan
Stanley. Pricetalk $15 although I think it may price above range in the $20
target.
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FreeMarkets
pto forma ipo valuation
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shares offered 4.14
target price per share $15.00
gross proceeds $62.10
shares out $33.95
IPO cap $509.32
warrants/options 11.40
fully-diluted shares out 45.35
FDS IPO cap $680.28
rev. 9 mos. to 9/99 $13.04
earnings (loss) ($13.48)
revenue multiple 39.14x
revenue multiple @
75% growth 22.36x
all figures in millions except share price and multiple
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So far more than the $1 billion it passed through its BidWare auction
service in 1998. More than $1.4 billion auctioned through its software
service in the first nine months of this year from more than 2,000 suppliers
in 30 countries. FreeMarket's BidWare software links bidders in a reverse
auction to fill orders for industry giants like General Motors, PepsiCo and
United Technologies.
On revenue, while not a huge number, FreeMarket generated $13 million
revenue for the nine months ending September 1999. Loss was $13.5 million
for the same period. Revenue comes from piece of the transaction plus
license fee.
We project $22 million for 1999 and could see what we think could nearly
double that in 2000 to $30 million, or 75% growth in top line.
IPO cap slated at $15 per share target puts FreeMarket at an implied $680
million IPO capitalization (we count options/warrants for fully-diluted
shares outstanding). FDS is the only number to use for valuation of public
companies since options and warrants can dilute a company substantially
(look at Priceline.com for an example).
FreeMarket market cap could hit north of $3 billion its first day we think,
based on the trillion dollar market segment it aims for.
So what exactly does FreeMarket do? match buyers and sellers in the
corporate space with goods. It served 21 clients this year, about double
that of 1998. General Motors and United Technologies represented about 77%
of its revenue (which is not good) in 1998. But this year that percent
dropped to 58%, showing FreeMarket's ability to diversify its client base, a
key we think for hedging risk.
Costs increased dramatically this year also, with R&D making up 23% of
revenues (which we see as positive since R&D fuels tomorrow's revenue if
done properly). But sales and marketing now account for 43% of revenue vs.
8% revenue for nine months ending September last year. Ouch!
Ariba (ARBA) and Commerce One (CMRC) are close comparables in the B2B buying
and selling game but FreeMarket's auction approach is unique among large
mammals in this genus. Even with its high reliance on a few customers today
we believe FreeMarket may be a gorilla in the midst of ecommerce.
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