BUSINESSWEEK ONLINE : MARCH 5, 2001 ISSUE
SPECIAL REPORT

Smoking Out the Smart Buys


Someday, most corporate software may be served up to the world's office workers from far-flung Web sites. But for now, picking winners among application service providers that have gone public is like shopping for property on a volcanic island: What looks like prime oceanfront digs one day could be turned to cinders by flowing lava a month or two later. In two years, more than 15 ASPs have gone public, and though many of them enjoyed some popularity with investors initially, in the past year they've lost an average of 83% of their value.

Still, there are plenty of opportunities for investors. Chief among them is VeriSign Inc. (VRSN), which owns about 75% of the market for Web-site encryption services. With its stock down 78% from its peak, to around $56, and the company generating $46 million in profits last quarter before merger-related charges, some analysts feel it's a good time to buy. Another solid citizen: Exult Inc. (EXLT), which provides human-resources applications, managing everything from payroll to benefits. The upstart recently inked a 10-year deal with Bank of America (BAC), helping push its stock to $12--some 18% above its June IPO. ''We like ASPs that handle one business better than anyone else,'' says Merrill Lynch & Co. analyst Bob Stimson.

Some of the biggest potential winners haven't gone public yet. A handful of the newest ASPs are automating software deployment and better integrating applications that weren't built to work together. Upstarts Jamcracker, Agilera Inc., and Loudcloud are developing ''smart'' online software. ''Some of the best companies have yet to come,'' says CIBC World Markets analyst Stephen J. Murphy. Judging by what's already available, that's welcome news.

By Ben Elgin in San Mateo, Calif.

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