Very nice article in Barron's Weekday Trader. Unfortunately, it doesn't appear in the print edition, so it gets seen by a smaller subset of the Barron's / Wall Street Journal readers.
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interactive.wsj.com
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June 14, 1999
Tech Companies Lead the Way to Brave 'Net
World
By Carolyn Whelan
Editor's Note: Today Internet Week begins in Barron's Online. From
Monday to Thursday all our features and columns will be devoted to the
impact of the Internet on business and the markets. Today's Weekday
Trader will focus on the Internet's effect on the technology sector, and
which companies are best-positioned to benefit.
Companies of all sizes, in all industries are using the Internet to sell more
products, reach new customers and cut their costs. Not surprisingly,
technology companies are on the cutting edge of the trend, and even those that
aren't commonly regarded as "Internet companies" are leading the way with
sophisticated and focused Internet strategies.
And the Internet train may be just leaving the station.
In fact, highly successful e-commerce companies like
Dell Computer consider themselves only halfway
there. Already, Dell makes $6.5 million in Web sales
daily, mostly in the U.S. But it hopes that incentives
like free Internet service in Europe will stimulate Internet usage -- and
purchases -- there, boosting online sales considerably worldwide.
Though Dell is a formidable competitor online (especially to rivals like Compaq
Computer), sales to consumers represent only a tiny slice of the enormous
e-commerce pie. While the competitive battles between, say, Amazon.com
and barnesandnoble.com grab all the headlines, online sales to businesses is
where the real money is
Indeed, by 2003 business-to-business sales of $ 621 billion will account for
88% of the total $708 billion e-commerce market -- a staggering 24 times the
$26 billion such sales registered in 1998, when they comprises 70% of a
$37.2 billion market, according to International Data Corporation.
"The hype is in the wrong spot," says IDC's Giraldi.
Maybe that's because businesses can measure the Internet's impact on the
bottom line right away. They also have networks in place to track orders, and
can benefit from volume discounts. The 'Net also helps them shorten the
delivery cycle, track revenues, plan for inventory and demand and interact
with customers more cheaply.
The upshot is likely to be an onslaught of startups, as barriers to entry are
leveled; intense price competition; the elimination of middlemen, such as
distributors; much lower costs for procuring supplies, and consolidation at all
levels, as companies try to buy their way into markets where they can't
compete themselves.
That may sound daunting, but the formula for success is likely to be
straightforward, no matter what companies are selling. According to IDC, it
will include a consistent Web presence, a customer-driven strategy (offering
features like personalized pages and profiles) and an international approach,
using tools like pages in different languages.
Among established technology companies, the usual suspects Dell, Intel and
Cisco Systems have emerged as early leaders. Cisco, for example, sells more
than $28 million in products daily, and saves $500 million in operating costs
per year though online sales, support and procurement.
In its first month of selling its products
online, Intel claims it did a billion dollars'
worth of business over the Internet. And
the company believes most of its sales
will be conducted over the Web by the
end of the year, according to Brian
Salerno, a portfolio manager at the
MunderNet Net Fund. The Santa
Clara, CA-based microprocessor giant
also plans to track its entire product
supply chain online, from components to
finished products.
Meanwhile, the stock is looking pretty reasonable at current prices. At
Monday's price of 54 3/8, Intel is around 24% off its 52-week high of 71
27/32, which it set in January. It also changes hands at 23x 1999 projected
earnings of $2.33 and at 20x 2000 earnings estimates of $2.72, according to
First Call. That's pretty much in line with its growth rate, but it's a nice discount
to the S&P 500's P/E, which is 26x projected 1999 earnings.
Software, says fund manager Salerno, is "the ultimate business for the Web,"
because the Internet makes it easy and cheap for customers to download and
upgrade. That's why software companies' entire business model may change
from one focused on the sale of shrink-wrapped boxes to a fee-based service.
In fact, Forrester Research estimates that the market for application software
rentals will grow to $6 billion by 2002 from zero today. Within a few years, it
may be as routine to rent software as it is to rent movies today.
Software companies Microsoft and Oracle have clearly benefited from the
Internet's exponential growth. Microsoft recently released its newest version of
its Office software suite, Office 2000, in a Web-enabled format. And though
Microsoft's Web strategy has been criticized as lacking coherence, it's
certainly not for lack of trying: The company has invested in everything from
video technology to editorial content to Web access, through businesses like
WebTV.
Meanwhile, Oracle claims that nine of the top ten business-to-business
e-commerce outfits run on Oracle database software -- and all ten of the
leading consumer e-commerce companies use Oracle products as well.
Oracle stock has sold off big lately (its
revenue growth last quarter came in
under expectations) and Wall Street is
waiting cautiously for the company to
announce earnings for the May 1999
fiscal year on Thursday. At Monday's
closing price of 26 7/16, it's 37% off its
high of 40 ½, which it set in February. It
also changes hands at 25x fiscal 2000
earnings of 98 cents a share, about in
line with its long-term growth rate of
24%.
But Oracle's P/E of 20x estimated earnings of $1.21 for fiscal 2001,
according to First Call, is a nice discount to that projected long-term growth
rate and is almost half its average P/E of 38x over the last five years,
according to Baseline.
Among the casualties: database software competitors Informix and Sybase,
which already have been "severely beaten in the Old World by Oracle," says
Salerno. They and others could well lose out to new, leaner rivals like Silknet
Software (which makes customer service software for the Web) and
Webtrends, which helps analyze the results of Web-based systems. Because
both of those companies went public only this year and have market values of
less than $500 million, the verdict is still out. But both stocks are also well off
their highs -- Silknet by 38% and Webtrends by 58%.
Although services are much more difficult to sell over the Web than, say,
standardized products like PCs or Palm Pilots, IBM has done well at selling
e-commerce services, as have companies like Sapient, Cambridge Technology
Partners and US Web, says Huaichen Chen, a portfolio manager at the
Dresdner RCM Global Technology Fund.
Of the pure-play service companies,
only US Web, which helps companies
define and implement Internet strategies,
looks both stable and reasonably
priced. At Monday's closing price of 22
7/8, it's nearly 50% off the high of 44
1/8 that it set in March. It also changes
hands at 58x estimated 1999 earnings
of 43 cents a share, according to First
Call, and at 35x projected 2000
earnings of 70 cents a share. That's a
nice discount to its long-term growth
rate of 50% and to its 2000 growth rate of 63%.
Clearly, the roller coaster ride many tech stocks are on reflect the incredible
potential -- and risks -- of the new online world. More than ever, upstarts with
unique ideas, products and brands can steal market share and threaten the
established players. Plus, the deflationary impact of the Internet and advancing
digital technology are cutting profit margins to the bone, especially in PC
hardware.
But one thing is sure -- for those that get it right, there are riches ahead. The
rule of this road is obviously lead, follow or get out of the way. |
