Briefing.com on B2B
...and please, when talking about GMST, speak kindly of the dead... :0(
B2B Revisited
[BRIEFING.COM - Gregory A. Jones] Since we first investigated the B2B sector in a series of Briefs last November/December, much has changed. The market for B2B software and services is exploding, but the stocks are imploding. This dichotomy certainly argues for a reappraisal of the sector.
Though the B2B stocks have suffered an across-the-board slaughter over the past month, it is important to keep these declines in perspective. The sector boomed last fall and early winter, with recent declines only unwinding a portion of those gains in many cases. A quick look at some of our long-time favorites in the B2B/CRM space clarifies this point:
Company Dec Current % Ch.
ARBA 50 5/64 90 3/4 81.2%
VIGN 106 1/2 171 1/2 61.0%
CMRC 115 119 1/2 3.9%
PCOR 53 5/16 22 9/16 -57.7%
OK, so not all of our favorites have fared well -- pcOrder.com (PCOR) has been a major disappointment. But this table does serve as a reminder that despite a sharp correction, the B2B sector has certainly not died. There have, however, been some important developments since December. We have written many times about these developments on the Story Stocks page, but it's time to take a more comprehensive look.
Empire Strikes Back
The most important development on the B2B front has been the rapid adoption of the technology by old economy standard bearers. B2B marketplaces have already been announced by leaders in the auto, aerospace, paper, and medical products sectors. Unfortunately, this has been a double-edged sword for the B2B companies. The good news is that B2B is being embraced much more quickly and aggressively than many had thought possible, and the early $1 tln transactions estimates for 2003 are likely to prove too conservative, perhaps dramatically so.
The bad news is that the old economy leaders have been eager to establish these marketplaces themselves rather than waiting on the B2B companies to do it for them. The result is that the transactions-based revenues in these marketplace deals will probably be less than expected.
This latter point we first noted on March 23 with the announcement of the B2B paper exchange, and it certainly has been a factor behind the recent plunge in B2B stock prices, most notably after the March 31 Prudential downgrades of many of these companies on precisely this concern.
The news then went from bad to worse, culminating Monday in Safeguard Scientifics' (SFE) announcement that it would no longer invest in B2B companies, and Mary Meeker's comments on CNBC that the shakeout in B2B might be even more pronounced than B2C.
But is it all that bad? For the stocks it has been. Since we first noted concerns about transactions-based revenues back on March 23, ARBA is off 31.6%, CRMC is down 41.7%, and the company formerly known as Chemdex -- Ventro (VNTR) has shed a staggering 63.3%. But when everyone agrees that B2B is doomed, it's time to take another look.
Still A Huge Market
The best case scenario for B2B -- one in which these companies owned the exchanges and the transaction revenues -- is not unfolding. The old economy companies are taking the equity stake and the lion's share of the transaction revenues in their exchanges. But that was just the best case scenario. It is important to note that the worst case scenario is not unfolding either. The positives are significant:
* B2B exchanges are being set up at a faster pace than had been expected.
* B2B companies are getting a slice of transactions in many (but not all) of these exchanges.
* B2B companies have thus far been involved in every major marketplace deal.
* The B2B software/marketplace companies are seeing booming software sales.
These positives are setting up especially well for the four companies that have thus far dominated the B2B exchange business: Ariba, Commerce One, i2 Technologies (ITWO), and Oracle (ORCL). These companies are all horizontal players (they are selling into every industry) and they are also software providers; thus they are benefitting whether or not they win the transactions-based business. As such, the long term prospects for these companies are still encouraging, even if they are slightly less encouraging than they were a few months back.
But the prospects for the pure exchanges have dimmed more substantially. That's why we have seen disproportionate hits to exchange B2Bs such as Sciquest.com (SQST), PurchasePro.com (PPRO), FreeMarkets (FMKT), and Ventro (VNTR). We would still recommend avoiding these companies even after their precipitous slides.
Far from being dead, B2B is booming. It's just booming in ways that benefit old economy companies more -- and new economy companies less -- than had been expected. But that's no reason to write off the entire group; instead, it's a reason to reevaluate and potentially take advantage of some exaggerated corrections in these stocks. What follows are some brief takes on a few of the B2Bs we first profiled last fall.
* Ariba (ARBA): At the time of our December brief, it was a neck and neck race between ARBA and CMRC for the lead in the horizontal B2B space. We have always liked both, but opted for CMRC as the best and initially were proven right when CMRC landed some big exchange deals. But ARBA then proceeded to land some very formidable deals of its own and has taken the lead back. It recently preannounced impressive Q1 revenues and continues to be one of the prime beneficiaries of the B2B boom, generating substantial software licensing revenues now, and looking good for significant transactions-based revenues down the road.
* Commerce One (CMRC): With more of an emphasis on transactions over software licenses than ARBA, CMRC has been harder amid the recent concerns about transactions-based revenues, but CMRC is still a major player in the space. Having returned all the way back to early December levels, the stock is once again looking attractive.
* FreeMarkets (FMKT): We were a big fan of FMKT pre-IPO, but the post-IPO price was too rich, and then we were forced to concede that the model was flawed after the company lost the GM business. Though the stock has slid even further, we are still not ready to embrace FMKT as its model is most susceptible to concerns about transactions revenues.
* PurchasePro.com (PPRO): Our complaints out PPRO have not changed at all. The pricing model of subscriptions and a cut of transactions always looked good, but the small business target market has never been that compelling. The revenues are still trivial for PPRO and we remain unconvinced that there is a market big enough to support the market cap, even after the recent plunge and the 52% slide since we first profiled PPRO last fall.
* VerticalNet (VERT): Here's another model that we didn't love. As much as the VERT content is excellent (we confess to being avid readers of the Fiber Optics site), the advertising model simply did not warrant the market cap of over $10 bln that VERT saw at its peak. The company is trying to get into the exchange business as well, in part through the acquisition of NECX, but this still looks to be an uphill battle. Finally, we still see downside risk if VERT is forced by the SEC to end its practice of including barter ads in its revenue figures; the company reported $3.8 mln in barter revenues last year out of total revenues of $20.8 mln in 1999. Even VERT warned in its 10K that future SEC rulings on barter transactions might result in "changes to our historical accounting policies and practices." This is one risk we wouldn't want to take.
* pcOrder.com (PCOR): Our one losing pick, and what a loser it has been. PCOR is one of those cases of a cheap stock getting cheaper. Despite executing well on its plan, PCOR's low relative valuation looks even more extreme now. Revenues were only respectable in Q4, but the model still looks solid to us. Though we have been battered on PCOR, we are not about to leave it now given that the story is still the same and the price is much lower. The key factor to watch is whether PCOR has success in its move into the office products vertical; future growth prospects depend importantly on the company's ability to expand beyond the PC business.
* Calico Commerce (CLIC): Though we were positive on PCOR, we were negative on its slower-growing competitor CLIC. And like PCOR, it too has fallen substantially. Revenues continued their sluggish growth in Q4, and Calico continues to show little progress in extending its business outside of the technology vertical, though a recent win of TheAgZone.com business was encouraging. We wouldn't write CLIC off, but we still want to see a more significant revenue ramp.
* Ventro (VNTR): When we first wrote this company up, it was Chemdex, and it was in the life sciences vertical -- not the biggest of markets. Now it's Ventro, and it's a B2B horizontal. Or is it? Investors thought so briefly, as they ran the price up to an absurd 243 1/2 after the name change. But it takes more than a name to be a horizontal player, and VNTR is not playing in the big leagues with ARBA, CMRC, ITWO, and ORCL.
* Sciquest.com (SQST): A second tier player in a second tier vertical. Need we say more? After a 74% plunge from the highs, we still question the valuation.
We will continue to revisit the B2B sector on occasion in the Stock Briefs section, and we will also write about developments as they occur on the Story Stocks page. And finally, after first promising a new Internet backbone series way back around Christmas, we will get started, with an emphasis on the fiber optics sector. Stay tuned.
Greg Jones - gjones@briefing.com |
