VerticalNet ? 15 March 2000
(Continued)
2
Summary
Essentially, VerticalNet plays in two markets ? B2B
advertising, which is potentially large, and B2B electronic
commerce, which is potentially extremely large.
VerticalNet?s model, which we consider highly
leveragable, started as and still predominantly is
advertising-based ? attracting targeted audiences to its 56
vertical communities in various industries and charging
suppliers for access to this valuable audience. However,
VerticalNet?s strategy is evolving quickly as management
has embarked on an aggressive multi-faceted strategy that
includes internal initiatives, partnerships, and acquisitions
to drive e-commerce revenue.
The size of the market opportunities VerticalNet addresses
and the strength of its model are not lost on investors, with
the stock having risen to $230 from its split-adjusted IPO
price of $8. Of late the stock has been driven by the
overall euphoria surrounding B2B as well as extremely
important and high-profile partnership announcements
with Microsoft, Softbank, British Telecom, and Internet
Capital Group. Given its recent run we wouldn?t be
surprised to see VERT particularly consolidate over the
near-term. If it does, we would use the opportunity to buy
the stock. With multiple revenue streams and exposure to
56 individual trade groups in eleven industrial sectors, we
view VERT as one of the more diversified plays in B2B.
Investors should strap in for volatility, but we believe there
is significant long-term upside. Our 12-18 month price
target is $350.
Overview
Beginning simply as WaterOnline, VerticalNet is now a
diversified B2B company operating 56 vertical trade
communities, spanning eleven industrial sectors.
VerticalNet?s communities provide industry specific
content, community aspects, and venues for generating
commerce. Each community is designed to attract
technical and purchasing professionals with highly
specialized product and specification requirements and
influence over corporate purchasing decisions.
Currently, advertising is VerticalNet?s principal revenue
stream. Advertising revenues are generated through
sponsorship and banner sales as well as through the sale of
storefronts, individual supplier web pages where suppliers
advertise their products. The company has recently signed
strategic partnerships with Microsoft and IBM that should
significantly accelerate the roll-out of storefronts and
related revenues for VerticalNet. (Microsoft is expected to
roll-out 80,000 storefronts over the next three years and
IBM is in the process of rolling out 375 sites.) At the end
of 1999, VerticalNet had 2,903 active storefronts.
Given the robust growth of its advertising revenues to date,
up over 450% from $3mm to $17mm from 1998 to 1999,
we believe VerticalNet has validated its value as an effective
medium through which suppliers can reach buyers.
So, with the value of the storefronts established,
VerticalNet now intends to migrate more toward
commerce revenue (a much more scaleable revenue stream
than the flat fees charged for storefronts). For some time,
VerticalNet has offered books, software, and other goods
and services from third parties. In what we view as a key
strategy for generating significant electronic commerce
revenue long-term, VerticalNet recently introduced E-Commerce
Centers, which can be viewed as ?souped-up?
storefronts. Among other features, E-Commerce Centers
allow buyers to purchase directly from suppliers with the
click of a mouse (VerticalNet will take a cut of these
transactions.) We expect VerticalNet to not only attract
new customers with E-Commerce Centers, but also ?up-sell?
existing storefront customers as well. To further
accelerate electronic commerce revenue, VerticalNet has
also recently acquired two offline electronic component
exchanges, NECX and Real World Electronics. It is
currently developing online exchange technology through
its recent Tradeum acquisition and utilizing the services of
CSC to move a meaningful chunk of these transactions
online over time. Once the online exchange for electronic
components is completed, VERT expects to leverage this
technology in other industry categories.
With approximately 40% of its traffic coming from outside
the US, VerticalNet already has meaningful brand
recognition abroad. Two VerticalNet joint ventures ? one
with Softbank in Japan of which VERT owns 40% and one
with British Telecom and ICG in Europe of which it owns
55% ? should allow VERT to capture value related to its
international brand recognition. Potential public offerings
of these JVs over the next two years, assuming they get
traction, could create additional value for VERT
shareholders.
Finally, in cases where some of VerticalNet?s communities
don?t have significant traction, we believe it is possible
that the company could restructure these verticals as JVs
with industry players that could stoke liquidity. Assuming
this scenario plays out and it works, IPOs of these JVs are
also a possibility.
Value-Proposition
As an marketing platform for suppliers, we believe the
value of VerticalNet is evidenced by the fact that leads left
on storefronts convert into sales approximately 20% of the
time and about 50% of these transactions are closed
between buyers and suppliers that are completely new to
each other.
In terms of commerce, for buyers, VerticalNet: 1) reduces
procurement process costs by automating purchasing
processes that today are largely manual, paper-intensive
and rife with human error; 2) reduces the costs related to
bloated inventory by increasing the speed at which
suppliers can fulfill orders; 3) provides buyers with better
selection and pricing by providing them with access to new
suppliers altogether. |
