We are not mentioed but they don't see us coming yet :)
B2B's the Place to Be
Leading Internet Analyst Calls for Pullback in
Consumer-based Stocks
By Cindy Christ
New research released Tuesday confirms what analysts
and venture capitalists have been
saying for months: the best way to profit from growth in
e-commerce lies with companies
selling goods and services to other businesses -- those in
the so-called "B2B" sector.
The study by Cyber Dialogue shows that the rate of
Internet adoption in the United States is
slowing, reflecting the gradual maturing of the market.
According to the study, the drop in the number of
people retaining Internet service is limited by
three major constraints. The most pervasive of these is
cost. Researchers say there are still
many adults who cannot afford to own a computer or
pay for Internet access.
In addition, one-third of all adults say they don't intend
to get online because they have no
need for the Internet. What's more, a large number of
adults have tried the Web and found no
use for it.
For e-commerce businesses catering to consumers, the
study implies that they can no longer
bank on a steady stream of new customers in the U.S.
Instead, they must grow their
businesses by investing heavily in customer retention
programs, by cross selling on other
websites and by encouraging repeat sales.
Likewise, Internet portals like America Online (AOL)
will have to work on increasing its number
of international users.
Leading Merrill Lynch Internet analyst Henry Blodget
was quick to respond to the results. In a
research note Wednesday, Blodget said that after the
holidays, investors will shift their
attention away from web retailing to the
business-to-business sector.
Blodget said the slowdown in new Internet users will cut
into growth prospects for
consumer-based e-commerce operators.
"We still believe there is enormous growth remaining in
this segment?but as the growth rates
slow, we continue to believe that the spoils will go to the
few, not the many," he wrote.
Blodget said that investors have piled into consumer
web stocks in anticipation of record online
holiday sales. But he predicts the sector will "pull back
as investors focus increasingly" on the
first quarter.
Blodget's advice supports recommendations handed
down in early November by Salomon
Smith Barney chief technology strategist Andrew Barrett.
Speaking at a conference in Hong Kong, Barrett
recommended that investors looking to make
quick returns buy consumer Internet stocks like
Amazon.com (AMZN). But he warned traders
to take profits before January when consumer-oriented
issues usually peak and companies
report earnings.
As consumer-based net stocks pull back, Blodget prefers
companies "that are gaining market
share and have strong international operations" like
Yahoo! (YHOO), America Online Inc.
(AOL), Doubleclick Inc. (DCLK) and Amazon.com.
"We think these stocks will go down less and recover
faster if a (first-quarter) pullback occurs,"
Blodget said in the note.
In a recent interview with Fortune Magazine, Blodget
went even further, predicting an
across-the-board "shakeout" over the next 12 months
similar to last summer's pullback in
Internet stocks.
"I believe 75 percent of the Internet companies out there
now will never make money and will
disappear within five years," he said, according to
Fortune.
Blodget told Fortune that he expects the most growth in
the B2B area and said Internet Capital
Group (ICGE) is a strong player in the group.
Market research firm Forrester Research projects that
business -to-consumer, or "B2C,"
websites will generate $108 billion in revenues by 2003.
At the same time, B2B revenues are
estimated to reach $1.3 trillion.
Growth expectations are especially favorable for
businesses involved in selling computer parts,
chemicals, electronics and medical equipment, experts
say.
Some analysts recommend investing in the B2B sector
through companies representing a
portfolio of businesses, such as ICGE. Based in Wayne,
Pa., Internet Capital is a holding
company involved in B2B e-commerce through a
network of 35 partner companies.
B2B firms ICGE has invested in include VerticalNet
(VERT), US Interactive (USIT) and
Breakaway Solutions (BWAY), among others.
Investors also can gain sector exposure by taking
positions in businesses directly involved in
B2B e-commerce, such as CareInsite (CARI), Chemdex
(CMDX) and VerticalNet (VERT), or in
infrastructure businesses benefiting from sector build
out, like Viant (VIAN), Ariba (ARBA) and
BEA Systems (BEAS).
It goes without saying that the next big thing in
e-commerce doesn't come without equal risk.
Like many Internet issues, B2B share prices are way
ahead of revenues and earnings.
Closing down Wednesday $8.43, or 5 percent, at
$159.56, ICGE shares are up 11 times from
their August IPO price. With only $16 million in sales
last year, the newbie still sports a $20
billion market cap. Its price/earnings ratio is roughly
1000 times last -year's earnings.
ICGE shares are set to split 2-for-1 Dec. 28.
Individual B2B stocks have seen similar explosions.
VerticalNet, for example, is up almost 600
percent from its February IPO price, based on
Wednesday's close of $91.94. The Philadelphia
-area company has a $3.2 billion market cap with
projected sales this year of only $17 million.
Since the sector is still in its infancy, a dearth of
investment opportunities are helping keep
share prices out of reach for most investors. That might
change soon, though. Dramatic growth
prospects have venture capitalists working overtime to
ready a wealth of new issues for market,
according to Fortune Magazine.
With more B2B issues down the road, investors can
afford to wait for share prices to come
down in a pullback, or to be driven down by
up-and-coming opportunities.
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