Fish or Cut Bait: B2B rebirth
By Paul R. La Monica
Redherring.com, August 14, 2000
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Business-to-business (B2B) is back! At least, the market has
picked a player it likes.
Investors have clearly singled out Ariba (Nasdaq: ARBA) as the
Anointed One in the B2B software area. Its stock is up more
than 150 percent since the Nasdaq hit its low point for the year
on May 23, and it's up 17 percent since the beginning of the
month.
Other B2B stocks have also recovered from this spring's tech
sell-off, but not nearly as much as Ariba. After a huge run-up in
March, Ariba is now just 30 percent off its all-time high, while its
main rival, Commerce One (Nasdaq: CMRC), languishes 70
percent below its peak. Commerce One is up about 23 percent
since the Nasdaq nadir, which is just slightly ahead of the
index's 22-percent bounce-back.
What's odd about this is that investors once again seem to be
trying to pick just one winner in a market that is clearly big
enough to support more than one player. That's just dumb.
It's similar to what I wrote about in a column about customer
relationship management stocks Broadvision (Nasdaq: BVSN) and
Art Technology Group (Nasdaq: ARTG) a few weeks ago. Making
a bet on just one company in a burgeoning and still-immature
market is really a recipe for disaster.
TRIPPING OVER TRILLIONS
Nobody seems to be able to agree on just how big the B2B area
could be, but no matter which number you believe in, it's still
absolutely colossal. Jupiter Communications (Nasdaq: JPTR) says
$6 trillion by 2005. Yankee Group says $3 trillion by 2004. But
hey, what's a few trillion between friends?
It seems clear that the demand for these companies' services is
not going away, and their fundamentals are remarkably similar.
Both Ariba and Commerce One had solid quarters, but Commerce
One got sold off because its numbers weren't as big as Ariba's.
That's silly. Ariba's revenue increased 101 percent on a
sequential basis to $80.7 million. Commerce One's increased 79
percent to $62.7 million. And for the time being, both companies
are getting the majority of their revenue from licensing fees:
Ariba, 66 percent; Commerce One, 65 percent.
Looking ahead, both should post their first profitable quarters
next year -- Ariba in September 2001, Commerce One in
December 2001. And over the next three to five years, analysts
are predicting earnings growth rates of about 60 percent a year
for both companies.
Richard Williams, an analyst with Jefferies, says a main reason
why Commerce One's valuation is far below Ariba's is that
investors are concerned about Commerce One's strategy of
taking stakes in the marketplaces they help create. This
strategy could put them in competition with their customers. But
he thinks that this fear is overblown. Some would even argue
that taking a cut of future revenue from these marketplaces is a
better strategy than relying mainly on licensing fees.
HEDGING YOUR BETS
So if you like this area, why not play both? I think there'll be
room for Ariba and Commerce One to thrive and prosper. Every
Coke has its Pepsi. Every McDonald's has its Burger King.
For what it's worth, Commerce One is now considerably cheaper
than Ariba. Commerce One is trading at about 19 times Mr.
Williams's 2001 revenue estimate, whereas Ariba is trading at a
multiple of 51 times his 2001 revenue estimate. So on that basis,
Commerce One is clearly the better buy. But, given the
momentum Ariba has behind it, can you afford not to own this
stock if you're a true B2B bull? Credit Suisse First Boston analyst
Christopher Vroom wrote in a recent report that he estimates
Ariba to have about a $250 million backlog in revenue.
According to data from Morningstar, eight of the ten largest
mutual fund owners of Commerce One also owned Ariba. And six
of Ariba's ten largest holders also owned Commerce One. If the
pros are hedging their bets, why shouldn't you?
OTHERS OF NOTE
And again, if the market will really be somewhere in the
trillion-dollar range in the next few years, then that's a lot of
revenue to go around. Focusing on even just two companies
would be missing the point. Ariba and Commerce One are
software companies. That's just one part of the larger B2B
world. There are other companies in this area with momentum,
such as FreeMarkets (Nasdaq: FMKT) and PurchasePro.com
(Nasdaq: PPRO), which operate exchanges and run
marketplaces.
FreeMarkets had a blockbuster IPO back in December -- soaring
more than 480 percent on its first day -- but has since tanked.
The company, which conducts auctions on online marketplaces,
is kind of like the flip side of Ariba and Commerce One. It gets
nearly all of its revenue from transaction fees, not software
licensing. But that has worked for FreeMarkets, which saw an 80
percent jump in revenue from the first quarter to the second
quarter. And gross margins increased from 41 percent to 43
percent.
PurchasePro.com doesn't get as much recognition as other
companies in B2B because it has chosen to focus more on small
and midsize businesses, not the Fortune 500 accounts that
Commerce One and Ariba covet. But this has proven to be a
successful strategy so far for PurchasePro.com, which saw its
revenues increase 109 percent from the first quarter to $9.5
million. What's more, the company is one of a select few in the
B2B area that is actually expected to earn money in 2001.
Analysts are predicting earnings per share of 26 cents next year.
Of course, these stocks are all fraught with risk. None of them
are profitable yet. And Mr. Williams says the B2B companies
need to continue their diversification efforts, either by
partnering with other software companies -- as Ariba has done
with I2 (Nasdaq: ITWO) and Commerce One has done with SAP
(NYSE: SAP) and Broadvision -- or by outright acquisition.
But all of these companies are moving steadily towards
profitability, and, like most software firms, they have really clean
balance sheets. Three of the four companies I've mentioned
have no long-term debt. And FreeMarkets's debt-to-capital ratio
is just 1 percent. That's an encouraging sign if expansion is in
the cards.
It's premature to try to pick who will be the winner ten years
from now, since all of them are currently reaping the benefits of
companies embracing online procurement. That's all the more
reason for long-term investors to spread their chips on a bunch
of bets to minimize the risk of losing it all. |
