B2B? It's Bubblicious! Breakfast with King Dead Fish Blodgett
Article from Smart Money:
When HENRY BLODGET speaks, people listen.
If Henry Blodget says you can make money on Internet stocks, nobody is surprised. When he says you can lose money if you're careless, you'd better be attentive.
The leading Internet prognosticator and head of Internet research at Merrill Lynch feted reporters today in a stately room off the firm's "Chairmen's Gallery," where some of the suits eat breakfast. It seemed like a grand
place for us to get our fix of quotations from Mr. B.
Blodget, who became notorious for placing a $400 price target on Amazon.com (AMZN), sometimes gets dismissed as a cockeyed optimist. It was quite something, then, to hear him predict that many business-to-business market makers --
companies now issuing stock to create Internet sites where goods are bought and sold by businesses -- would die by the middle of the decade. He sees opportunity, but only in a few places.
In fact, Blodget has long held that only a few current Internet stocks will last beyond a couple of years. And he says B2B companies face an even riskier market -- and
have a greater opportunity -- than consumer-oriented sites like Amazon. (He was right about Amazon's price, on a split-adjusted basis, by the way.)
These B2B plays run Internet commerce for old-fashioned
industries like steel, pharmaceuticals and plastics. Some will find ripe markets, Blodget said, while others will wither. But as he previously insisted with Amazon, Yahoo! (YHOO), eToys (ETYS) and other stocks great and small, Blodget says capitalists risk more by not investing in these companies at all.
Gulp. At least you've heard of Amazon and eToys. How's an
investor to ferret out the best B2B companies without even knowing their names or what they do?
One way is to invest in companies that serve several markets. Blodget and fellow analyst Ed McCabe cited Ariba
(ARBA), VerticalNet (VERT) and incubator Internet Capital Group (ICGE) as showcase B2B stocks. (Merrill underwrote Ariba and Internet Capital Group's stock offerings; Blodget and McCabe initiated coverage on VerticalNet Wednesday with an Accumulate and a Long-Term Buy.) All invest in software and systems with tendrils in several industries, from salt to paint to pumps and motors.
In reviewing B2B companies and markets like these, Blodget urged, investors should ask two questions: What's wrong
with the industry's current supply structure? And, What will industry players have to do differently in order to start trading goods over the Internet?
There are two kinds of B2B plays. The first depends on
advertising revenue, since the market makers won't be able to take very big cuts of whatever orders flow across their sites. These companies serve industries like auto manufacturing, where there are only a few big players who control enough moolah to demand equity stakes in the market
makers and deny them cuts of transaction revenue. For example, CommerceOne (CMRC) and Oracle (ORCL) are teaming up to build an online parts-ordering network for Ford Motor (F), General Motors (GM) and DaimlerChrysler (DCX).
The second kind of B2B play serves industries with a broader sweep of buyers and sellers. There, B2B market makers earn money from transactions. In metals, for example, an online-trading market can improve efficiency, as long as it improves on issues of geography, logistics
and speed.
How can you judge a B2B market maker's ability to address
such issues when so many of them are new? "If a company doesn't rapidly approach positive cash flow from its operations," said McCabe, you want to get out. And there's the rub: Buying B2B stocks now makes venture capitalists out of plain-folks investors. Venture capitalists expect at
least a quarter of their investments to tank, Blodget reminded us. The failure rate among B2B plays may be higher.
Indeed, Blodget sees a future strewn with casualties. (For dramatic effect, he bracketed his presentation with a passage from "Julius Caesar.") The survivors, he says,
will either play in many industries -- like VerticalNet -- or will expand out from focused markets (like steel to other metals), until they generate enough volume to keep themselves in business.
Blodget said B2B companies might mimic the behavior of Amazon, which has proceeded seemingly willy-nilly from books into music, electronics, toys, auctions and home improvement. Amazon still hasn't made a dime, and its stock now trades in a pretty tight range. But it once made plenty of investors plenty rich.
Of course, the book business is probably less stubborn and
complex than is heavy industry. After the breakfast, imbued with the gospel according to Merrill Lynch, we called Andrew Bartels, an analyst with market-research firm Giga Information Group. Bartels argues that big companies that want to use the Internet for buying and selling goods won't ever give large cuts of their order revenue to B2B companies. Rather than pay more to an outside middleman, Bartels says, industry leaders will probably build their own e-commerce networks.
Leading industrial companies will own the market-maker sites, Bartels says, and will run them not to make profits but to minimize costs in their overall businesses. He's most optimistic about the Chemdex unit of Ventro (VNTR),
which is setting up e-commerce sites for industries within the chemical sector, but he generally doesn't expect market makers to capture more than 3% of overall transaction revenue.
And that's not enough to support current valuations for very long. So where Blodget and McCabe urge cautious and deliberate entry into this market, Bartels advises individual investors to wait until valuations fall back a little. "The hype and expectation of what is going to happen has run so far ahead of reality that really good companies are massively overvalued," Bartels argues.
Gee, where have we heard that before? |
