Siebel Systems: Attractive After Pullback
individualinvestor.com
Analyst: Will Frankenhoff (3/31/00)
Since we initially recommended Siebel Systems (NASDAQ: SEBL - Quotes, News, Boards) in the August issue of Individual Investor magazine at a split-adjusted price of $25, the shares have risen approximately 340%, closing Thursday at $114.50.
Impressive as this performance has been, it should also be noted that Siebel?s shares are 37% off their 52-week high of $175.13, reached just three short weeks ago, and are down 24% this week alone as one of the many casualties of the tech carnage wracking the Nasdaq. However, while we believe that many overvalued companies are rightly seeing their market caps reduced, we believe that the pullback in Siebel?s shares represents an attractive buying opportunity.
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Why? There are a number of reasons but the primary one is its position as the dominant supplier of customer relationship management (CRM) software. To illustrate just how effectively Siebel has leveraged its scale and strong execution, an investor need look no farther than the fact that its two closest competitors were both forced to be acquired ? Clarify by Nortel (NYSE: NT - Quotes, News, Boards) and Vantive by Peoplesoft (NASDAQ: PSFT - Quotes, News, Boards).
The market for CRM software, or so-called ?front office? software that helps corporations better serve their customers and partners, is expected by the International Data Corporation (IDC) to grow from $1.68 billion in 1999 to more than $13 billion in 2003, a compounded annual growth rate (CAGR) of 97%.
Since Siebel is the market leader with an estimated 17% share (compared with 15.4% share in 1998 and 12.2% in 1997), the company stands to benefit more than any other from expected demand.
While Siebel has traditionally targeted its products toward Fortune 1000 companies, it has recently been leveraging its best-of-breed technology to penetrate the mid-market through strategic relationships with resellers Great Plains Software (NASDAQ: SGPI - Quotes, News, Boards) and JD Edwards (NASDAQ: JDEC - Quotes, News, Boards).
Indications are that acceptance was good, since in its first quarter of reselling Siebel?s products, Great Plains captured 35 customers for its Great Plains Siebel Front Office products. While revenue from these relationships are minimal presently, they should significantly contribute to indirect channel revenue down the road.
Siebel hasn?t been lagging in the market of eCRM applications as the company introduced the first entirely web-based family of CRM applications, Siebel 99, in December of 1998 and the subsequent release of Siebel 99.5 in mid-1999. This market is estimated by IDC to grow from $2.3 billion in 1999 to more than $10 billion in 2003, implying a CAGR of 45% - an estimate we believe may be conservative.
Siebel is expected to release its Siebel eBusiness Applications (Siebel 2000) suite in the upcoming quarter. Some highlights of this suite include wireless device delivery, developed in concert with Nokia (NYSE: NOK - Quotes, News, Boards), out-of-the-box integration with ERP products and improved personalization technology. We believe that this suite will significantly upgrade the attractiveness of Siebel?s products to Internet companies and will provide a strong earnings driver going forward.
Given that Siebel?s previous eCRM products were quickly snapped up by Internet companies such as Yahoo (NASDAQ: YHOO - Quotes, News, Boards), ExciteatHome (NASDAQ: ATHM - Quotes, News, Boards), Women.com (NASDAQ: WOMN - Quotes, News, Boards), Flash.com, and Stamps.com (NASDAQ: STMP - Quotes, News, Boards) among others, Siebel 2000 should do nicely indeed. It also doesn?t hurt that Siebel has established partnerships with Ariba (NASDAQ: ARBA - Quotes, News, Boards) and BroadVision (NASDAQ: BVSN - Quotes, News, Boards), two of the leading e-procurement and e-commerce vendors on the web.
While Siebel has over 65 strategic relationships, the one we believe holds the greatest upside potential is with International Business Machines (NYSE: IBM - Quotes, News, Boards). The old news is that Siebel and IBM had formed a global partnership in October in which IBM would resell Siebel?s suite of e-business applications to its worldwide customer base. The new news, announced after the market closed on February 10, is that IBM had selected the e-business suite for global deployment across its entire organization.
This massive deployment, when completed, will serve more than 50,000 internal IBM users, 30,000 IBM?s business partners and millions of customers over the web. Even more importantly, this deployment represents the first true eCRM rollout in which a global company is integrating all its communications channels on a single vendor?s platform.
Simply put, this type of endorsement by a company like IBM just underscores how Siebel has become the dominant provider of front office software, both in the CRM and eCRM markets.
Bottom Line:
Given Siebel?s domination of the rapidly growing CRM and eCRM markets, its proven ability to leverage its scale while providing strong execution, and the strength of its strategic relationships, we believe that Siebel?s shares have been oversold, and that investors should jump in with both feet.
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