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headline: =DJ TIP SHEET: Fiduciary's Galligan Likes Net Infrastructure
Dow Jones International News Service via Dow Jones
By Joelle Tessler
NEW YORK (Dow Jones)--The original promise of electronic commerce - that it
would free merchants of the huge capital and inventory requirements that weigh
down traditional bricks-and-mortar retailers - has drawn herds of investors into
shares of Internet-only merchants like Amazon.com Inc. (AMZN) over the past
year.
But Drew Galligan, small-cap technology analyst at Fiduciary Trust Co.
International, which manages $1.7 billion in small-cap investments, believes
much of this promise may not hold true. Galligan shies away from investing in
the online retailers, although he sees huge opportunities for the companies that
supply them with software and equipment.
It is true, Galligan agrees, that Internet-based merchants don't face the high
capital costs of building stores and paying rent that their offline competitors
do. What's more, Galligan acknowledges, online-only retailers don't need to keep
nearly as much inventory on hand because they don't have to keep real-world
stores stocked. And of course, the growth of Internet retailers is not limited
by the number of stores they can open because "the beauty of the Internet is
that you have a universal presence from the day you start," he said.
But, Galligan warns, online-only retailers have plenty of capital requirements
of their own. For one thing, he said, many big players are finding that the
business is not entirely virtual and that they do actually have to invest a lot
of money in both bricks and mortar and inventory.
Amazon, for instance, recently said it will spend $300 million to build more
warehouses - the company plans to have seven distribution centers around the
country by the 1999 holiday season - and will continue to spend on inventory and
hiring. Amazon expects continued losses for the forseeable future as it spends
to expand its business.
"People underestimated the importance of fulfillment in the online world and
underestimated the amount of money it would take," Galligan said.
Marketing costs are also substantial for online retailers since they must make
shoppers aware that they exist. "You have to build a name for yourself,"
Galligan said, adding that marketing spending is very much an ongoing expense.
At the same time, the rapid rate of revenue growth that has attracted so many
investors to electronic commerce stocks can't continue forever - in part because
it is harder to expand off of a bigger base. While growth should remain strong,
especially through the holiday season, "hyper-growth has already started to
slow," Galligan said.
In the second quarter, for instance, Amazon's revenue rose just 7%
sequentially, down from 16% in the first quarter and more than 30% in the
quarters before that.
Internet Merchants Face Pricing Pressures
Meanwhile, Galligan said, competition on the Web is fierce because anyone can
set up shop online. And many are trying, including well-established offline
retailers that have no intention of missing the party.
Competition, in turn, has led to pricing pressure on the Internet,
particularly because many online retailers are selling commodity-like products
that are readily available from multiple merchants, such as books, CDs and
electronics.
"You can sell commodity-like products on the Internet because people don't
have to interact with them ... but that creates pricing pressure," Galligan
said. "It's an environment of perfect competition."
Despite these concerns, Galligan does expect electronic commerce to be huge.
The analyst said he would invest in the industry's rapid growth through
infrastructure companies. No matter which online merchants survive in the
competitive Internet retailing environment, they will all have to invest in the
hardware and software needed to do business on the Web, he reasons.
"Everyone is rushing to get onto the Internet before this Christmas season,"
Galligan said. "The Internet is like the gold rush of the 1800s."
During that mania, Galligan noted, the big winners were the companies that
provided the pick axes, shovels and other necessary supplies to goldminers
seeking to strike it rich. Galligan in fact pointed to one well-known company
that got its start during that time: Levi Strauss & Co.
This time around, Galligan believes, companies that provide packaged
electronic commerce software applications and information technology services -
such as BroadVision Inc. (BVSN), Vignette Corp. (VIGN) and Allaire Corp. (ALLR)
- will make out well.
Companies that provide the infrastructure for business-to-business electronic
commerce, which is starting to dwarf business-to-consumer e-commerce in size,
are particularly good bets, Galligan said. In this category, he pointed to Ariba
Inc. (ARBA) and Commerce One Inc. (CMRC), which make software used to build
electronic trading networks to connect companies with customers and suppliers.
Network security companies also stand to benefit, Galligan said, since it is
critical that online transactions be secure. VeriSign Inc. (VRSN), Entrust
Technologies Inc. (ENTU) and ISS Group Inc. (ISSX) are good plays in this
business.
Galligan also likes companies that make the hardware that forms the backbone
of the Internet, such as the giant networking equipment maker Cisco Systems Inc.
(CSCO).
The analyst particularly likes companies that provide technology that is
driving the growth of Internet bandwidth to expand the capacity of the Net and
make high-speed connections possible. These include players like PMC-Sierra Inc.
(PMCS), which makes semiconductors used in broadband communications networks,
and JDS Uniphase Corp. (JDSU), which makes components used to build out
high-capacity fiber-optic networks.
"There will be a lot of traffic over the Internet and we have to build the
highways to support it," Galligan said. "There is a huge shortage of bandwidth."
-By Joelle Tessler; 201-938-5285
(END) Dow Jones Newswires 07-09-99
1902GMT
(AP-DJ-09-07-99 1902GMT) |
