Web software makers arm the revolution
By R. Scott Raynovich
Redherring.com
November 18, 1999
BOSTON -- As an attendee of U.S. Bancorp Piper Jaffray's Internet conference says: "All you have to do these days is breathe, and a stock goes up 20 or 30 points."
Finding a unique and interesting stock story is becoming more difficult in a world where your next-door neighbor might receive a multibillion dollar valuation for taking public his daughter's Web site. In an economy where stock gains seem gratuitous and random, it may be safer to look at general categories benefiting from dot-com fever, rather than companies with niche business models.
Internet software infrastructure companies are a good example because their customer base can be anybody, from dot-com startups who need tools for building Web sites to Fortune 500 companies building comprehensive Web empires. In short, any company leveraging the Web needs to buy from software infrastructure players. Consequently, the group as a whole benefits from general growth in the Internet. Many of these companies attended Wednesday's Bancorp conference.
The market for Internet software infrastructure is vast and fragmented, making it fertile territory for companies to establish themselves and expand market share and product lines. The market grew increasingly tangled when Netscape and other early leaders underwent drastic organizational changes, such as mergers and acquisitions, which enabled startups to gain visibility. To complicate things further, technology seems to change weekly.
PACKING HEAT
"This is a hot sector," says Piper Jaffray analyst Hany M. Nada. "Many of these stocks are up 200 percent since the beginning of the year. I believe the best place to invest is in the arms dealers. Right now we have an arms race on the Internet."
Among companies that may be thrown into a general bucket of Web arms dealers are Allaire (Nasdaq: ALLR), Art Technology Group (Nasdaq: ARTG), Broadvision (Nasdaq: BVSN), and Vignette (Nasdaq: VIGN). These companies -- along with seasoned vendors of Web application platforms, such as IBM (NYSE: IBM), Sun Microsystems (Nasdaq: SUNW), and BEA Systems (Nasdaq: BEAS) -- sell either development platforms or prepackaged software and tools for building Web applications.
Art Technology, for example, is taking the platform route, playing off its origins as a systems integrator. The company claims its platform product Dynamo, which evolved out of a custom solution engineered by consultants, is more extensible and scalable than packaged application servers sold by Broadvision and Vignette. By contrast, Broadvision and Vignette are focusing on packaged applications that address vertical markets, emphasizing how the market is moving away from custom applications requiring extensive programming.
YOU SAY TOMATO
Who's right? There's no clear answer. Each company made strong cases to conference onlookers. "We used to be elite integrators, and we've converted our expertise," says Art Technology's CEO Jeet Singh, a ponytailed MIT alumnus. "We win against application platform vendors because we have applications; we win against packaged applications vendors because we have extensibility."
Broadvision officials argue that the packaged application approach is the way to go. The company reported steadily increasing profits since becoming profitable in 1998. The company is building from its application server base to develop targeted applications for vertical markets.
For example, the company's first vertical application will be a bill presentment tool built together with Security First National Bank. Chief Technology Officer Eric Golin believes that packaged Web applications -- specifically those built for vertical markets -- are more enticing to large corporations than custom-built solutions. "Most chief information officers would much rather have a packaged application than a custom solution they build themselves," says Mr. Golin.
The standing-room-only crowd watching Mr. Golin's presentation at the Seaport Hotel indicated that Broadvision still has its admirers. Indeed, Broadvision's numbers look promising. The company reported $50.9 million in revenue for 1998 and net income of $4 million, or 16 cents a share. Piper's Mr. Nada estimates the company will post quarterly sales of $105 million in the fourth quarter of 1999. By comparison, Art Technology reported a 1998 loss of $2.6 million on $12.1 million in revenue. Vignette, which started booking revenue in the third quarter of 1998, reported $25 million in revenue and a loss of $16 million in the first two quarters of 1999.
Eddie Sanchez, portfolio manager at Citigroup Investments, likes companies that take a platform approach rather than those touting packaged applications. His fund has a position in BEA Systems. "That's where you get a competitive advantage, because platform guys allow you to build competitive systems," says Mr. Sanchez.
IT'S ALL GOOD
Regardless of which company emerges as the leader, stocks of companies in this sector have risen dramatically this year. For example, Vignette, which closed Wednesday at $165.25, has been stellar, quadrupling in value since the beginning of the year. Art Technology, likewise, closed at $67.50 Wednesday and is up more than 300 percent since it dipped into the teens soon after its July IPO. Broadvision has risen a jaw-dropping 700 percent since the beginning of the year, closing at $88 Wednesday. Allaire, which focuses on development tools rather than Web applications platforms as a whole, closed Wednesday at $124.44, up 126 percent since its IPO in February.
These days, everybody wants a piece of the Internet, but the competitive landscape and high valuations make betting on a single company risky. The sector approach makes more sense. By looking at sectors as a whole, investors may avoid the risks associated with a stock whose valuation is sky-high. The sector as a whole looks destined to grow over time, regardless of which companies come out as winners.
Heard in the halls: a hedge fund manager, speaking anonymously, noted that many small-fund managers have been frustrated in attempts to lock in profits during a recent rise among new tech and Internet offerings because small floats -- available public shares -- make it impossible to sell the stocks without substantially driving down prices, which erases gains.
This effect may be contributing to a spectacular rise of some small-float stocks. Funds can get a jump in, but they can't safely jump out. |
