ARBA and Software B2B stocks. I like ARBA, CMRC, VERT, ORCL.
and a couple of others.
PPRO has some work to do to convince me. I'm not sure
I bought the CEO's pitch.
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Software Providers Are Seen as Safer Bets After B2B Meltdown
By Joe Bousquin
Staff Reporter
4/28/00 10:22 PM ET
There's nothing like the aftermath of a good selloff to differentiate the companies in a sector. In the case of business-to-business e-commerce stocks, that means separating the software providers from the dot-com market makers.
Take Ariba (ARBA:Nasdaq - news - boards), a software maker whose product allows users to buy, sell and auction goods over the Internet, and compare it with PurchasePro.com (PPRO:Nasdaq - news - boards), which runs a Web site on which users can buy, sell and auction goods.
During the B2B blowup of March and April, both stocks got whacked dramatically, as did the B2B group as a whole. But some stocks were more whackable than others. Ariba, for instance, fell 67%, while PurchasePro.com lost 84% of its value.
Now, while Ariba has recovered nearly 30% from its lows, PurchasePro.com has regained just 20% of its steeper losses. If one looks at the stocks of other software providers, such as Commerce One (CMRC:Nasdaq - news - boards) and Oracle (ORCL:Nasdaq - news - boards), compared with those of other dot-com market makers, like Ventro (VNTR:Nasdaq - news - boards) and VerticalNet (VERT:Nasdaq - news - boards), the story is virtually the same.
What this divergence in performance illustrates, analysts say, is a willingness by investors to take a risk on B2B companies that have something to sell -- like software -- while shunning dot-com "concept" names that merely charge for access to a Web-based marketplace. While some dot-coms, like VerticalNet, have made stronger rebounds off their quarterly results than others, the shares of these companies generally haven't been as buoyant on the rebound as those of their software counterparts.
But the skeptical market that is rewarding software companies also may be overlooking the opportunity that the dot-com B2B companies have. While the advantages of selling software to corporate giants like General Motors (GM:NYSE - news - boards) and Boeing (BE:NYSE - news - boards) at millions of dollars a pop are obvious, smaller businesses may not want to pony up that kind of cash to take part in the B2B revolution. For them, a user name and password, garnered for a small monthly fee, may be the best dot-com solution of all.
"There's something to be said for that," says Patrick Walravens, an analyst with Lehman Brothers who follows B2B stocks. "There's certainly a value proposition there for businesses that aren't going to go out and spend millions on software."
That's a message that Charles "Junior" Johnson, the colorful chief executive of PurchasePro.com, has been trying to get across to investors. Over breakfast recently at a trendy lower Manhattan eatery, he spelled out his vision for the commerce of the future.
"It's not about big spend," says Johnson, whose company charges a subscription fee of about $75 a month for access to its network. The company has about 21,000 businesses on that network -- though not all are subscribers -- and boasts approximately 155 marketplaces. "Big spend is a factor in very few businesses. It's about guys in Lexington selling light bulbs to guys in Las Vegas. This is just a time game. I guarantee, we're going to make a lot of money, and we'll be the first ones to be profitable."
In a step toward that goal, Johnson announced on a recent conference call with analysts that he and COO Christopher Carton will forgo any compensation until PurchasePro is profitable.
In that sense, Johnson's edict about B2B being a time game may hold more truth than he realizes. While he boasted of 93% profit margins on that call, his company's revenue for the quarter amounted to only $4.5 million, and losses amounted to $8.3 million. While Johnson says that revenue will rise -- and be recurring because of PurchasePro's subscription model -- investors seem to be looking for the bird of profitability in the hand, not the dot-com bush.
"We're now in a market where people are looking for a definable path toward profitability," says Edward McCabe, B2B analyst at Merrill Lynch. "The software providers and enablers are able to show that immediately."
"By and large, the dot-coms who need to attract buyers and suppliers to create liquidity in their exchanges, they require a bigger leap of faith from investors," McCabe says. "With the software guys, you're betting on the guys providing the picks and shovels. With the dot-com guys, you're making a bet on a particular miner hitting gold."
Combined with the fact that many industries are forming consortiums to set up exchanges on their own -- for which they will need software -- this longer payoff horizon has helped put the dot-com B2B stocks out of favor. That said, one of the dot-com miners did seem to hit some gold this past week.
VerticalNet, which specializes in building trading communities for specific industry-focused niches -- how does AdhesivesAndSealants.com strike you? -- announced on Wednesday that its revenue grew an astounding 1,320% to $27.5 million for the quarter.
While that revenue was derived largely from advertising, as well as from transaction fees, the numbers themselves suggest to some that building trading communities, rather than just handing industries the software to do it themselves, does hold potential.
And investors, at least, have seen some promise in this nonsoftware name. Its stock, which closed at 28 on April 14, now has recaptured some momentum to trade in the 50s, more than 80% off of its lows. That said, it's still 60% off of its highs.
"VerticalNet has developed a very interesting sell-side solution," says Chris Vroom, an analyst with Credit Suisse First Boston who rates the stock a strong buy. His firm has performed underwriting for VerticalNet. "They've got a platform that suppliers simply plug into. I think their model is going to prove to be robust."
It could also prove to be optimal. While big corporations are still announcing exchanges almost daily -- for which they'll need software -- analysts have grown increasingly skeptical of big corporations' ability to work cooperatively with their competitors. Thursday, for instance, saw the heralding of an exchange for the airlines. But exactly how it will be set up, how big a stake each participant will have and what technology it will run on was left up in the air.
"It's difficult to get a single company to agree on things across all its own internal divisions and departments," says Eric Upin, an analyst with Robertson Stephens who rates VerticalNet a buy and whose firm hasn't performed underwriting for the company. "How are you going to get these companies to work with each other? We're very skeptical of the consortiums. They're being formed out of two reasons: greed and fear."
Yet while the potential for the dot-com businesses seems to be present, it will take more than potential for investors to turn into believers.
"For these [dot-com] marketplaces to work, there's a couple of assumptions you need to make before you get meaningful liquidity," says Merrill's McCabe. "And this is not a market that's making a lot of assumptions."
Which means don't assume that potential automatically turns into profitability.
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