B2B Potential Hits an Iceberg of Investor Discomfort
By Joe Bousquin
Staff Reporter
5/11/00 9:31 PM ET
Business-to-business e-commerce, as everyone by now knows, has trillions of dollars of potential. But, with many stocks such as Ariba (ARBA:Nasdaq - news - boards), Commerce One (CMRC:Nasdaq - news - boards) and VerticalNet (VERT:Nasdaq - news - boards) off their highs by 60% or more, potential doesn't go very far in the market anymore.
At the Chase H&Q Technology Conference, where the mood was grim in the midst of another tough week for tech stocks, investors were saying the promise of B2B just isn't enough to warrant buying those stocks.
Instead, what investors are looking for are immediate, tangible results. The irony, though, is that B2B companies still have the same promise if not more than they did just a few months ago; they're just too young to deliver many tangible results.
"Sure, the potential for B2B is huge," says Jeff Van Harte, manager of the Transamerica Premier Equity Fund. "But it's going to take a while for these companies to develop and take hold."
A growth manager who likes tech but who's never been blindly enamoured with it, Van Harte points to the exchanges that many industry groups are forming, like the one among grocery buyers, in which a favorite company of his, Safeway (SWY:NYSE - news - boards), is involved.
"Safeway going into a purchasing group with its peers is great, but I think what a lot of these things will be is simply private joint ventures at first, and then they'll see if it actually works."
Whether it actually works is a problem that many investors have with B2B at this point. With different revenue models -- transaction fees vs. software licensing, for example -- being questioned, many investors are unclear on who will ultimately gain an economic advantage from B2B e-commerce.
"People are starting to ask the right questions," said Mike Dubrow, an analyst with Jacob Asset Management, after sitting in on a presentation from VerticalNet. (His firm does not own VerticalNet stock.) "Who is going to benefit from these exchanges? Is it the intermediaries? The industry incumbents? Or the exchanges themselves? No one knows."
Not many people are throwing around astronomical estimates anymore about the size of the B2B market, either. Dubrow notes that people are talking differently about B2B now, thanks in part to the debate over transaction fees -- whether exchanges will be able to charge companies who use the online markets.
"It used to be that people would say if you can get 1% on $1.3 trillion, that's great," Dubrow said. "But people aren't doing the math like that anymore because first, it's ridiculous, and second, it's not clear who will get what."
Also unclear is how B2B companies, like many other Internet-based companies, should be valued. George Huertas, a money manager at Windy Hill Capital Management in Lafayette, Calif., says another issue looming over the sector is sustainability.
"The fear is that all these companies grow 100% for the next two years, and then that's it," Huertas said. "Last year, the B2B companies with the best stories did the best. But now, the market is trying to determine a value on these things, and how do you do that?"
Many just aren't doing anything at all, because of that valuation issue.
Just listen to Nick Moore, a senior analyst for Jurika & Voyles in Oakland, Calif., who was talking stocks shortly after B2B supply-chain software maker i2 Technologies (ITWO:Nasdaq - news - boards) presented here Thursday morning.
"I am such a bull on i2 Technologies," Moore said. "I think they are the e-commerce play over the next decade."
But does he own the stock?
"No, not currently, not at these prices," Moore said. "People have forgotten how big 10 times sales is. That's an incredibly large number."
i2, for example, is currently trading at more than 25 times sales.
This whole gloom-and-doom outlook, wrapped up with the uncertainty of who the winners of B2B will be, has one-time sector fans looking elsewhere.
Windy Hill's Huertas, for example, said he has been concentrating on "infrastructure plays," which he characterized as chip and equipment makers. A recent favorite pick of his, gleaned here at the Chase H&Q conference, is video storage and conversion company Pinnacle Systems (PCLE:Nasdaq - news - boards), which sells its services to both on and off-line companies.
Jacob's Dubrow wasn't very interested in what VerticalNet had to say at the Chase H&Q affair, even though Mark Walsh, the company's CEO, reiterated the $221 million in guaranteed revenue the company will receive over the next three years through a deal it recently struck with Microsoft (MSFT:Nasdaq - news - boards).
"Haven't we seen in the consumer space companies who were going to leverage content toward an e-commerce model? We have, and it didn't work," Dubrow said.
In other words, investors don't want to get burned again. After hearing about and investing in the potential for B2C Internet companies, which have now turned south, investors say they aren't interested in buying strictly on B2B's potential. They want profit.
Unfortunately for B2B, it has a lot of the former, but very little of the latter right now.
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