CMRC....
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Stocks for Mom
Commerce One
By David Forrest (TMF Bogey)
May 9, 2000
Trading at $51 1/16 as of May 8, 2000
Dear Mom,
One thing I know for certain is that you love a good sale. Remember that neon yellow Izod and those
lime green Dickies you bought me when I was 10 years old? How about the time when you stocked
up on every kid's breakfast dream, Mini-Wheats cereal? That was a great sale, huh?
Well, it's time for me to return the favor. I know that the stock market's recent ups and downs have
made you a bit queasy, but whenever that happens it creates an opportunity to buy some good
companies on the cheap, just like those Mini-Wheats.
One company whose stock price has fallen hard in the short term is a company called Commerce
One (Nasdaq: CMRC) .
Business: Mom, Commerce One is one of those "B2B" stocks that you hear the talking heads
squawk so much about on the television. B2B is just an abbreviation for "business to business." In the
past six months to a year, there has been an incredible interest in any company that is involved in
B2B. What's all the fuss about?
Quite simply, the world is waking up to the idea that businesses can sell products to one another on
the Internet. Big whoop, right? After all, this isn't something new, is it? Businesses have been selling
products and services to one another for a long time. The cool part is that in the physical world
companies aren't able to efficiently meet all together in one marketplace and showcase their products
for sale with one another like they can on the Internet.
Here is a quote from Commerce One's website explaining the efficiencies gained by trading online.
Referring to the automotive market, a General Motors (NYSE: GM) executive writes: "According
to industry figures, it costs approximately $100 to process and manage a purchase order through
conventional means. By processing purchase orders via the Internet, the cost can be reduced to
around $10 per order."
The Internet allows many similar companies to come together like never before so they can sell stuff
to one another quickly and easily. To give you an example, automobile companies General Motors,
Ford (NYSE: F) and DaimlerChrysler (NYSE: DCX) all got together and set up an automotive
exchange on the Internet that allows them to sell auto parts and other car-related things to one
another.
So, if Ford needs to buy 2,000 radiators, it can go to this exchange, see what is being offered, and
buy the parts online -- just like you buy books. All of the auto manufacturers love this because it
saves them time and money and helps them better control their inventory and their production of new
cars. It's going to save them millions and millions of dollars over time.
OK, you're probably asking yourself at this point, "David, what the heck does any of this have to do
with Commerce One?" Very simply, someone has to build the virtual trading exchanges for these
large industrial companies to do business over the Web. Commerce One specializes in building
trading exchanges.
Using our example above, Commerce One will sell special software to GM, Ford, and
DaimlerChrysler (and every other participant in the auto exchange) so that they can conduct business.
This software is pretty expensive and a good source of sales for Commerce One. The great thing for
Commerce One is that the companies simply cannot do business without the software, so they all
have to pay. They also have to pay as upgrades get made to the software and the exchanges become
even better.
Mom, as exciting as the software sales are for Commerce One, that's not the really compelling part
of their business to me. Can you say "transaction revenue"? In the exchanges that Commerce One
has set up so far, it has negotiated the deals so that it gets some slice of every single product sold.
So, if the auto exchange trades $100-billion worth of products in a given year, Commerce One will
share in that revenue. As more and more companies come online to participate in these virtual trading
exchanges, the amount of business transacted grows and grows. All of this is great for Commerce
One because it gets a piece of the pie.
It gets a little more complicated than this, but you get the basic idea. If this is interesting to you, we
can always continue the conversation about how the company generates transaction revenue on the
Commerce One discussion board. There is an active discussion about Commerce One there with
some great contributions from Goldmund33, AcesWild, Benning, and other folks.
Keys to Success: In order for Commerce One to continue to be successful, it needs to continue
striking deals with big companies to build these exchanges. It also needs to continue negotiating
transaction revenue in every deal that it does. Finally, it needs to continue to offer great service by
developing great software and responding very quickly to the needs of its customers. So far, things
look encouraging to me. In the past year, Commerce One has struck the following deals:
1.Automotive exchange with GM -- This is what we talked about above.
2.Aerospace exchange with Boeing -- This is even bigger in actual transaction revenue than the
auto exchange and what I consider to be the biggest feather in Commerce One's cap thus far.
3.Petroleum exchange with Royal Dutch/Shell -- Royal Dutch has been joined by at least 14
other major oil companies from around the world, including British Petroleum.
There are many other smaller deals that Commerce One has struck, but these are three of the largest.
I think it would be a good idea for you to visit the company's website to see all of the customers it
has.
Risks: There are always lots of risks with any new business, and Commerce One is definitely a new
business. Lots and lots of companies are trying to do exactly what Commerce One is doing, including
biggies like Oracle (Nasdaq: ORCL) and some very tenacious youngsters like Ariba (Nasdaq:
ARBA) and i2 (Nasdaq: ITWO) . In fact, Oracle is also one of the providers in the auto exchange
with Commerce One, and the scuttlebutt is that these folks aren't wild about one another.
This is an intensely competitive business and Commerce One cannot make mistakes. If it is not able
to negotiate decent transaction revenue in every deal it does, things could get ugly. The company
currently has an $8-billion market capitalization with only $66 million in sales. It will not thrive on
software sales alone. Transaction revenue is an absolute must.
The Numbers: Commerce One is growing very, very quickly. Its year-over-year sales growth rate
is explosive at about 1,500%. Clearly this pace won't continue, but analysts expect this year's sales
to be in the $220-million range and next year's to be around $400 million. That's impressive growth
and explains why the company's market capitalization is at $8 billion.
Commerce One is in excellent financial health with $97 million in cash and inconsequential
($129,000) long-term debt. It's not yet known how much revenue it will take in from transactions,
and this probably won't be significant until the end of this year. On the earnings front, Commerce One
is currently losing money because it is spending a lot of cash to build up the business now so it can
reap the benefits later on. I don't mind that it isn't profitable so long as it continues to keep a nice
cash pile and no debt.
Conclusion: Make no mistake, Commerce One is as risky as the stock I told you about last year,
Metromedia Fiber Network (Nasdaq: MFNX) . It's a small company in a new industry, and it has
significant challenges ahead of it as a business. That said, it has done an absolutely outstanding job of
signing some of the largest B2B exchanges in existence. I believe that these deals will give other large
companies the confidence in Commerce One to strike equally large deals and that it will continue to
get big contract wins.
The stock price at the time of this writing is $55 1/2, about 1/3 of where it was at the high last year.
The recent downdraft in the Nasdaq has caused many of the B2B stocks to fall sharply. In
Commerce One's case, I think the market has thrown the baby out with the bath water.
Mom, as always, please make sure you do your own research and don't just buy this stock because I
like it. As you know, I'm far from perfect. To help you get started on that research road, I've built a
little Commerce One "tour" for you. Just click the following link and you'll be taken on a cool tour of
some Web pages that I picked out for you to learn more about this company.
Commerce One Cool Fool Tour
Love always,
David
Commerce One Company Information:
Trades on Nasdaq under symbol CMRC
Website: www.commerceone.com
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