John, wsj.com's "Heard on the Street" confirms your arguments.
Software Firms Are Quietly
Building Big Market Share
interactive.wsj.com
By DON CLARK
Staff Reporter of THE WALL STREET JOURNAL
Any investor would love to travel back to 1986 and stock up on shares of
Microsoft. Others daydream of getting in early on tomorrow's goldmine.
Good luck finding another Bill Gates. But a handful of obscure-sounding
software companies have quietly built big market capitalizations and market
shares, and convinced many analysts that the good times have just begun.
The mini-Microsofts, as they might be called, include Veritas Software, BEA
Systems, Rational Software and Check Point Software Technologies. All are
behind-the-scenes players in a fundamental change in the way companies
design and manage their business processes.
Unlike the once-hot dot-coms, these four companies are very profitable,
time-tested and conservatively managed.
Not that they show any lack of confidence. "We believe that over the next five
years there is an opportunity to build a company with $100 billion to $300
billion market cap," says Paul Levy, chief executive officer of Rational
Software, whose market value currently stands at nearly $11 billion. "It is our
birthright to do that."
Veritas CEO Mark Leslie, who has watched his company's market value top
$60 billion, adds: "I just see no limits to our markets."
These stocks are already in nosebleed territory. While the tech-heavy Nasdaq
Composite Index has declined over 15% so far this year, these four
companies' shares are up from 61% to 211% apiece. They currently trade
anywhere from 72 to 245 times analysts' estimates for next year's earnings --
compared with Microsoft's price-to-earnings multiple of 33 -- and their shares
have lately swung wildly on the slightest negative sign.
Additional upside in the choppy market environment may be difficult to
achieve. Tomas Isakowitz, an analyst at Janney Montgomery & Scott, has an
"accumulate" rather than "buy" rating on Check Point, for example, because
of a lofty stock price that finished Friday at $154.69. His 12-month price target
is $188, which would be a hefty 102 times his 2001 earnings estimate.
But corporations are still in the early stages of building their business
processes around Web technologies. At the very least, suppliers of
building-block programs seem a safer harbor than many other technology
bets.
If the market turbulence worsens, "these companies could get hit," says Anne
Meisner, an analyst with Goldman Sachs, which has its highest ratings on all
four stocks. "But the fundamentals are very strong."
The notion that software could become sexy again is a bit surprising. Not long
ago, investors seemed obsessed with the notion that Internet start-ups would
begin offering services that would replace programs that corporations buy and
operate. Then stock-pickers seized upon network hardware makers and other
purveyors of Internet plumbing.
But it turns out software could be the most widely used plumbing of all.
Personal computers, cell phones, pocket computers, office and factory
equipment all require their own programs, plus new layers of code to interact
with larger server machines. Where corporations once tailored such systems
for their own employees, the electronic-commerce craze has forced them to
develop Web-based systems that give customers and suppliers direct access
to internal information resources.
It's a huge amount of work, and many corporations have a lot riding on how
quickly they can develop new products or improve internal operations.
"Ultimately, a company's time to market gets determined by the speed with
which it can develop software," says Wendell Laidley, an analyst at Credit
Suisse First Boston.
The mini-Microsofts handle key roles in this transformation.
Veritas develops software used to back up data and ensure the reliability of
information flow between computers and storage systems. Rational is a
leader in software-development tools, letting customers model complex
systems before writing the first line of code.
BEA Systems, whose market value stands at about $34 billion, leads a
segment known as application servers, a kind of middle layer of software that
corporations use to develop Web-based programs that work with many types
of hardware and software. Check Point, with a $24 billion cap, is the dominant
provider of firewall software to keep hackers out and virtual private networks for
secure communications over the Internet.
Significantly, none of the companies take sides in the industry's past religious
wars, such as whether Microsoft's Windows operating system or rivals such
as Unix or Linux will dominate. They work with all sides in such battles, and
have niches that aren't likely to attract a direct assault by Microsoft.
Indeed, virtually all corporate applications are being designed so any device
with a Web browser can tap into them. That isn't what many people expected
a few years ago, when most corporations and software companies focused on
developing code for PCs and Windows, and Microsoft seemed to call most of
the shots.
"The fact that these companies can become mini-Microsofts has something
to do with Microsoft no longer being as powerful as it once was," says John
McPeake, an analyst at Prudential Securities.
These aren't the only key software suppliers in the new game. Oracle, with a
$169 billion market cap to Microsoft's $350 billion, sells databases that have
become standard-issue in developing Web-based applications. Siebel
Systems, at almost $48 billion, is the leader in programs that manage
relations with customers. Ariba, an e-commerce software specialist, is
currently valued at $29.8 billion.
But the new infrastructure specialists are the newest in a particularly
exclusive club -- strategic advisers to corporations about the directions of key
technologies. Mr. Levy of Rational predicts his company will get a "seat at the
table" in the computing hierarchy of a sort now occupied by the likes of
Microsoft, Sun Microsystems, Intel and Cisco Systems, and so do others.
"There is a de facto stack of technology enabling e-commerce -- Cisco, Sun,
Oracle and BEA," says William Coleman, BEA's chief executive officer.
The four companies' perspective, of course, is narrower than that of Microsoft.
The Redmond, Wash., giant stands to get revenue almost every time a PC or
laptop machine is sold, as well as for many server systems. It is an open
question whether the mini-Microsofts will ever reach as broad a market.
"If you get 97% of the application server market, is that going to be same as
97% of the PC market?" asks Dawn Simon, who holds BEA, Check Point and
Veritas as a fund manager with Merrill Lynch Investment Managers. "Will
there be more servers than people?"
Maybe not. But the numbers of devices that have to communicate with
servers can only multiply, Ms. Simons notes. And as Web-based applications
become more fundamental to daily life, customers will demand that
companies spend the money to make sure they work reliably.
"The whole world has decided they want to run seven by 24 by forever," says
Mr. Leslie of Veritas, whose company is expected to hit $1.2 billion in revenue
this year. "I can honestly say I am more bullish about getting to $10 billion in
revenues than I was about getting to $100 million or $1 billion
TTOSBT |
