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Subject: internet insight! 2000.04.13 Smokey The Bear
Date: Thu, 13 Apr 2000 00:37:15 -0700
From: netstock-mailer@listserve.com
Reply-To: list-admin@e-harmon.com
To: "internet insight!" <Netstock-Report@lr2.listserve.com>
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internet insight!
By Randy Chin
VP Investment Research
/e:harmon zero gravity/
(note: Randy was on the team that took Ariba and TIBCO public among many
Internet ecommerce companies. I asked him to share his wisdom on the B2B
sector especially which has taken a beating. Enjoy his insights! - Steve
Harmon)
2000.04.13 Smokey The Bear On Conflagrations
Nature can be a powerful, fickle, sometimes brutal but strangely efficient
force. Take forest fires for example. Despite the most advanced
technologies, techniques and strategies humans can offer, given the wrong
conditions forest fires can rage uncontrolled for days if not weeks. But
eventually, the forces of nature inevitably shift and the fire runs its
course. The effects can be double edged. While acre after acre may be
blackened and ravaged, the positive underlying effect is that it clears the
way for new growth that over time can be a source of renewal and opportunity.
The same is true for the stock market.
At least once, often twice a year, it's typical for the stock market to
undergo a sizeable, sometimes painful correction.
Recent examples include the summer/fall of 1998 (33% decline in the NASDAQ
from peak to trough) and the summer of 1999 (a 15% decline in the NASDAQ).
The current downdraft has negatively impacted the NASDAQ Composite by 27%
from the March peak through last night. This sharp sell-off came on the
heels of a 95% run up in the NASDAQ from October through March. Recent
darlings, such as the B2B e-commerce and broadband/IP equipment sectors,
have been particularly hard hit.
Why the sudden, sharp change in sentiment, especially in the B2B space? If
we had to boil it down to the essentials, we'd pinpoint the following
factors:
--Concerns that valuations were becoming wildly excessive
--Questions about pricing power and the ability of vendors to generate
transaction-based fees
--Realization that the Old Economy companies would fight back vigorously
with their own Net initiatives
--Fears that some B2B leaders, such as i2 Technologies, E.piphany and
Peregrine Systems among others, had overpaid for recent acquisitions
--Stock charts that had begun to break down and look toppy
Just as a forest fire sets the stage for consolidation followed by renewed
growth, we think the current correction is a necessary evil that will
enable a more clear distinction between winners and losers. Until recently,
almost every stock evenly remotely connected to the Internet and B2B was
able to buy a one-way ticket higher (and higher). The recent return to
investor sobriety seems to have broken the back of reckless speculation. As
the table below indicates the following sample of ten leading B2B names has
surrendered close to $181 billion in market cap over the last several weeks.
please see e-harmon.com for table after 930am pacific time
Despite this hemorrhaging we believe the B2B sector is far from through as
a long-term investment trend. A good example of a bellwether name in the
B2B space is Ariba (which by the way reported much stronger than expected
financial results last night). Few companies typify both the promise and
the potential upside of the B2B movement than Ariba. It's hard to believe
but Ariba's stock has only been around for ten months. But during this
short tenure the Company has ramped from an annualized revenue run rate of
$40M to $160M. During this period, it has remained cash flow positive,
unlike most of its Internet brethren. Its customer base has expanded from
over 30 companies to over 200 blue-chip accounts (including more than 20 of
the Fortune 100). Although the stock has endured a sizeable haircut in
recent weeks, long-term shareholders have still faired very well. In fact,
Ariba's stock still trades more than 12-fold higher than its split adjusted
IPO price of $5.75.
We believe the core fundamentals in the B2B sector are still in the first
or second inning of a long, exciting ballgame. While valuations spiraled to
unsustainable heights in the 4Q and 1Q, we believe these excesses are
systematically being wrung out of the markets. When the blood letting ends,
we believe a select group of B2B players are poised to move from the pack
and become breakaway leaders. As a result, we suspect the next wave upward
in the Internet sector will be more discretionary.
______________________
Disclaimer: /e:harmon zero gravity/ does not make specific trading
recommendations or give individualized market advice. Information contained
in internet insight! is provided as an information service only. e-harmon
zero gravity recommends that you get personal advice from an investment
professional before buying or selling stocks or other securities. The
securities markets and especially Internet stocks are highly speculative
areas for investments and only you can determine what level of risk is
appropriate for you. Also, users should be aware that e-harmon.com, its
employees and affiliates may own securities that are the subject of reports,
reviews or analysis in internet insight!. Although e-harmon.com obtains the
information reported herein from what it deems reliable sources, no warranty
can be given as to the accuracy or completeness of any of the information
provided or as to the results obtained by individuals using such
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the information provided.
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