TREET WISE by Amey Stone
HOW TO INVEST IN E-COMMERCE STOCKS:
CAREFULLY
Investors who trade in and out of Amazon.com (AMZN) or Yahoo! (YHOO) on a daily basis
won't find many helpful tips in How to Invest in E-Commerce Stocks (McGraw-Hill, $24.95), a
new book by Bill Burnham. But those who favor a more rational, grounded approach to investing
and have been scared away from the sector by the unprecedented run-ups in a handful of Web
retailers will find this book a key to unlocking the mysteries of E-commerce.
The book doesn't delve into serious security analysis or attempt to justify the current sky-high
prices of some Internet stocks. Rather it provides an in-depth explanation of the underlying
technologies and fundamental business issues that drive E-commerce companies. "A lot of what's
going on now is speculative frenzy," argues Burnham. "When you make a true investment, you
should understand what the company does, who the competitors are, what the growth catalysts are,
and where the risks are."
Burnham, who is now a senior analyst at Credit Suisse First Boston but was employed at Piper
Jaffray when he did the research for this book, may have been the first stock analyst to focus
purely on electronic commerce. He started back in early 1997 when Web retailing was in its
fledgling stage, and when the real E-commerce players were companies that provide the
infrastructure to support commerce on the 'Net. "Now everybody is really focused on a few
high-profile names," he says. "But what people don't realize is that there is a huge infrastructure
that makes it possible to do business on the Internet. I tried to focus on not just the front end, but
also the back end."
Even investors who are focused on the hot retail stocks, such as Amazon.com and eBay (EBAY),
should understand the technology that goes into making all that shopping possible, Burnham
contends. He expects many readers to use his book as a reference tool. For example, if a Web
retailer announces that it is using a new encryption technology, readers can turn to the book to
learn what that means.
FIVE KEY SECTORS. Because of its broad focus, the clearly written book deals with a wide
range of companies -- including some not-so-hot ones that may offer decent potential for
long-term investors. In the course of 380 pages, Burnham devotes a chapter to each of the five
E-commerce sectors he has identified: security (companies that provide network security systems
and encryption tools); electronic payments (those that process credit cards and handle billing);
financial services software producers (whose programs provide consumers and businesses with
access to their own financial information); business commerce software (companies that provide
software linking internal corporate systems to the Internet); and commerce content (the retail,
financial services, and industrial purchasing companies that do business with their customers on
the Net).
The main drivers of E-commerce -- the increasing reach of the Internet, improvements in
technology and companies' need to become more efficient -- have an equal impact on all of those
sectors, he contends. "Yet I think only the commerce content companies are getting the full credit
for that," he says. The infrastruture companies with the best fundamentals, he believes, include
Broadvision (BVSN), Networks Associates (NETA), Axent Technologies (AXNT), and Sterling
Commerce (SE), which is a more conservative Internet play. The book's appendix profiles about
50 public E-commerce companies across Burnham's five sectors.
While infrastructure companies haven't enjoyed the same skyrocketing stock prices as Web
retailers, Burnham doesn't think they are necessarily cheap right now. He warns investors to be
wary of the risks in this sector, pointing out that the average E-commerce stock he covers is more
than twice as volatile, based on daily price moves, as the average stock in S&P. "In any stock that
has risen 10 times the year before, there is a lot of risk," he says.
"ELEPHANT" ATTACKS. The good news for investors looking for a decent buy is that he
expects stocks in the group to get slammed at some point, perhaps because of a significant security
breech or because a major technology company like Microsoft or IBM ("elephants," he calls
them), launches a major competitive attack.
"What I suggest is to find a company you are comfortable with from a fundamental standpoint,"
he says, meaning that its growth prospects are based on solid business principles. "If that stock
seems expensive today, chances are, given how volatile this group is, at some point the stock will
come down in price dramatically." The hard part, he says, is having the courage to buy when
everyone else is selling. "But that is your day to buy."
How to Invest in E-Commerce Stocks may not help short-term traders plot their next move. But
it does provide the kind of clear analysis and sound advice that can help long-term investors chart
a course through the roiling Internet seas. |
