Web Necessities
Like selling wheelbarrows to the 49ers
By Scott Reeves
The California gold rush made only a handful of miners rich, but a shrewd few
cleaned up by selling wheelbarrows or blue jeans to the hordes that flocked to the
Sierra foothills. In the same way, Websites offer the allure of unimaginable
riches, but like the gold seekers, many will fail. If the valuation of many Internet
stocks, especially those ending with .com, makes you a little uneasy, there's a sane
way to play the sector: Bet on the system's backbone or development tools and
leave the risk of running the Websites to others. Allaire, a software developer for
a range of Web applications, looks like such a play. Boom or bust, there will be a
need for its software tools to create and run interactive Websites, just as those
panning for gold needed the basics.
This is sanity by Internet standards, of course, and that demands buckets of
caution. Allaire will perform well, perhaps rising as much as 50% in first-day
trading, and it's a much stronger company than those warranting a quick flip and
forget. But keep an eye on the stock, because Allaire competes with software
giants, and the field is changing rapidly.
Allaire develops and markets application development and server software for the
World Wide Web, including tools to build static or high-volume interactive
pages. Its primary product, ColdFusion, enables Web developers to create
applications, including electronic commerce and content management, and
includes what the company calls "high-level building blocks" that permit the
integration of databases, servers and other information technologies. The
company's other major product, HomeSite, allows users to create static Websites.
The company has licensed more than 30,000 copies of ColdFusion and 100,000 of
HomeSite. Customers include Boeing, Credit Suisse First Boston, HewlettPackard,
Intel, J.C. Penney, Lockheed Martin, Lucent Technologies, MCI WorldCom,
Microsoft, SBC Communications and United Parcel Service.
Allaire was founded in May 1995 and earned its first license revenues in
February 1996. Like most Internet companies, its limited operating history makes
it difficult to evaluate its performance and future prospects. On September 30,
1998, the company had an accumulated deficit of $17.4 million, but revenue
growth is strong. For the nine months ended September 30, it reported a net loss
of $8 million on revenues of $13.9 million, compared with a loss of $4.5 million
on revenues of $4.6 million for the same period in 1997. However, demand for
Allaire's software is strong and will continue to increase as the number of
Internet users grows.
Unlike many whiz kids whose companies founder after leaving the garage,
Chairman Joseph Allaire, 29, had the sense to sign up a professional management
team. CEO David Orfao, 39, and CFO David Gerth, 46, bring solid resumes to
the new company.
Competitors include IBM, Microsoft, Netscape Communications, Sun
Microsystems, Oracle, Sybase, Symantec, Informix Software and Inprise,
formerly Borland International. Medium-sized companies and startups active in
the field include Vignette, HAHT Software, GoLive Systems, BroadVision and
SilverStreams Software. That's stiff competition, but the presence of Microsoft
underscores the strength of the sector. Allaire's solid products and possible
acquisitions in the future may make it an attractive takeover candidate.
Allaire, of Cambridge, Massachusetts, plans to offer 2.2 million shares at
$15-$17 each via Credit Suisse First Boston in a deal expected to be priced this
week. Current stockholders paid an average of $1.77 a share. There will be about
10.2 million shares outstanding after the IPO. Net proceeds will be used for
product development, expansion of international operations and for marketing.
The proposed Nasdaq symbol is ALLR.
Smith-Gardner & Associates of Delray Beach, Florida, is another software
company worth a look. Its products are designed to automate non-store
commercial activity, including advertising analysis, sales, telemarketing,
ordering, merchandising, procurement, electronic commerce, warehousing,
shipping, accounting and systems operation. For the nine months ended
September 30, the company reported net income of $2.1 million on revenues of
$24.7 million. It plans to offer 4.41 million shares at $8-$10 each via BT Alex.
Brown next week.
Smith-Gardner won't open as strongly as Allaire, but it's similar to Manhattan
Associates (Offerings in the Offing, April 4, 1998), which has performed well.
Manhattan Associates, a developer of software to track the flow of goods through
distribution centers, priced 3.5 million shares at $15 each via Deutsche Morgan
Grenfell. The stock opened at 26 and recently fetched 25.
The combination of "Internet" and "software" means Allaire's IPO will open
strongly, but the deal offers more than just a solid opening pop. In most IPOs, the
savvy investor is in and out of the deal within three to six months and returns to
the stock only if the company has been seasoned by solid performance. Despite its
lack of a track record, Allaire's strong products and big-name customers make it
worth considering as a buy and hold -- but investors should realize they're buying
into a fair degree of risk, and hold for some volatility. |
