Individual Investor
Internet Capital Group: Ground Zero for B2B
Senior Analyst: Garrett Bekker (3/10/00)
Internet Capital Group (NASDAQ: ICGE - news)is one of the best ways to play the explosion of interest in B2B e-commerce.
Like the other Internet incubators that have successfully brought a series of Internet stocks to the public markets - CMGI (NASDAQ: CMGI - news) and Safeguard Scientifics (NYSE: SFE - news) - Internet Capital Group is putting together a stable of Internet companies. But ICG's value is its focus on business-to-business or ``B2B' e-commerce.
The advantage of this approach is that buying ICG is like buying a diversified investment portfolio of B2B e-commerce plays, which any investor who hasn't been asleep for the past year can tell you is perhaps the hottest area of the Internet these days.
But during late February, the stock declined more than 50% from its recent all-time high of $212 to a low of $96.94. Since then it has rebounded roughly 45%, gaining $1.31 on Wednesday to close at $139.44.
The stock got a big boost on Monday when analyst Eric Upin of Robertson Stephens cited ICG as one of his best investment ideas. The shares promptly rose $23.19, or 19.5%.
We think ICG has room for more upside.
ICG's current holdings total 56 separate B2B-focused partners, broken down into two categories: Infrastructure Service Providers and Market Makers. The latter consist of some of the hottest segments of the ``New Economy,' including outsourced application hosting, e-commerce consulting, systems integration, digital market places and e-mail messaging services.
Most of the company's holdings are private companies, but a handful are already traded publicly and several others have filed for initial public offerings.
Each of its 20 partner companies in the infrastructure service providers category offer goods and services that are a vital piece of the overall B2B e-commerce experience, including consulting and technical services for Internet marketing [US Interactive (NASDAQ: USIT - news)], B2B marketplace software platforms (Tradex), application hosting [Breakaway Solutions (NASDAQ: BWAY - news) and Jamcracker], transactions and payment processing, credit card authorization and fraud tracking (ClearCommerce), encryption software for secure transactions (Entegrity Solutions), real-time traffic monitoring (traffic.com) and logistics (logistics.com); Residential Delivery Services) and supply chain collaboration software (Syncra Systems).
In the market makers group, ICG currently has 36 separate properties, with eight horizontal market makers and 28 vertical market makers. Horizontal market makers provide a single product or service across multiple industry verticals, while vertical market makers concentrate on providing a number of services within a single industry.
One of the hottest properties in the market makers group is VerticalNet (NASDAQ: VERT - news), which like its parent also takes a portfolio approach with a stable of more than 50 B2B online communities, all of which are focused on a different industry, or ``vertical' market. ICG's 36% interest in VerticalNet is worth $3.6 billion and it makes it the most diversified way to play the growth in B2B, hands down.
Other vertical markets in which ICG has a presence include agricultural products (CyberCrop.com), apparel and sewn goods (Animated Images), asset management (PlanSponsor Exchange), auto parts (Autovia), chemicals (E-chemicals), construction (BidCom; Eu-supply.com), lumber (TALPX), metals (Metalsite.com), paper (PaperExchange), electronic components (iParts), food (Internet Commerce Systems), online procurement and management of employee health benefits (EmployeeLife.com) and telecommunications (Arbinet).
One drawback to ICG has to do with the difficulty of valuing it. ICG functions like a holding company, but a proper analysis requires valuing its various properties. One way to do this is to calculate the net asset value of the companies nearest their IPO.
Once the NAV is obtained, then a market cap/NAV multiple can be obtained. Current estimates from Merrill Lynch peg ICG's net asset value at roughly $6.3 billion, which, when combined with a market cap of roughly $36.6 billion leaves a market cap/NAV multiple of 5.8. This is down substantially from earlier levels, when ICG traded as high as 11 times NAV.
With the publicly traded holdings, analysts at least have the ability to study the public market value of them. With the private holdings, however, public valuations aren't available. Thus we'd take NAV estimates for ICG with a grain of salt.
Standard fundamental valuation metrics may not be as relevant as the other qualitative measures of performance, such as its ability to successfully spin out its partner companies, add new partner companies to the mix, and the increasing dominance of those partners in their respective niches.
Of the 56 total partner companies in the portfolio, only a handful have already gone public, including VerticalNet, eMerge Interactive (NASDAQ: EMRG - news), US Interactive and Breakaway Solutions. This means that there is a lot of room for participation in the future IPOs of its private partners. Already, ServiceSoft Technologies, iSky, Onvia.com, Deja.com, Commerx, and Universal Access are in registration for public offering.
In addition, ICG added 10 new partner companies during the fourth quarter alone.
ICG also has a list of strategic investors reads like a ``who's who' of premier technology companies, including Safeguard, which owns 13.9% of ICG, Compaq Computer (NYSE: CPQ - news), General Electric (NYSE: GE - news) and Dell Computer (NASDAQ: DELL - news).
Perhaps the biggest risk is that since the company's value rests so squarely on eventually spinning out its holdings via IPOs), a downturn in the scorching-hot Nasdaq that also cools the IPO market could take ICG's value down with it.
Another potential short-term risk is the continued expiration of ``lock-up' agreements with underwriters, which will allow more shares to become available for trading. While this may lead to some increased selling pressure, many of these shareholders are long-term strategic investors that will likely hold on to their shares.
Bottom Line:
As one of the most diversified ways to participate in the ongoing B2B land grab, we think now's a good time for risk-tolerant investors to take a serious look at ICG.
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