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E.piphany (
EPNY
) is the kind of company many investors might be patting themselves on the back for not buying earlier this year. It's true the market went into a temporary frenzy for stocks of any company in customer-relationship management (CRM), and in its near-vertical ascent E.piphany reached a high of $325 a share in March. But it fell back to a low of $43 in April, and since then it has traded between $60 and $100 -- closing on Oct. 13 at $67.44. Earlier this year, "any and every company showing any promise had a huge surge in valuation that was totally irrational and illogical," says Dana Serman, an analyst with Lazard Freres & Co., who recently initiated coverage of E.piphany with an "outperform" rating and a $85 price target.
The CRM label no longer sends investors into paroxysms of delight, but four-year-old E.piphany appears to be executing its plan admirably. It's a leader in making software that helps companies assemble and analyze customer information to achieve more effective marketing. For example, Nissan is using E.piphany's software to develop targeted offers for current customers based on data such as a family's income, stage of life, and number of drivers. "In the new customer economy, you have to deliver products that are tailored to the individual," says E.piphany CEO Roger S. Siboni.
Expected to lose money the next four quarters, the $2.8 billion market-cap company is hardly cheap. But it should increase sales more than fivefold this year, with Serman looking for revenues to reach $113 million in 2000, up from $19 million in 1999. That makes it one of those hot growth stocks investors should keep on their list for when market sentiment improves.
APPROACH WITH CAUTION. Even analysts who are big fans of the company agree that now may not be the best time to buy. With the economy apparently slowing and the Nasdaq experiencing a lot more downs than ups, Robinson-Humphrey analyst William Chappell downgraded E.piphany from a buy to an outperform rating in early October. He believes a "cloud is hovering" over the sector brought on in part by a Sept. 29 warning from competitor Exchange Applications (
EXAP
) that its third-quarter revenues would come in below the previous quarter.
Chappell's main concern is that even though E.piphany has few dot-com customers, it will still feel the pain of the dot-com downturn. Already, he argues, traditional companies are less fearful of dot-com competition and are slowing their adoption of CRM software. "Market share is being taken by a few leaders, such as E.piphany," he says. "But during the shakeout, it is going to be tough for anybody." For investors who can ride out the next few months of volatility, he says, "E.piphany is one of the ones to own."
Serman says weak market conditions are the primary reason he started E.piphany with a middling outperform rating. "In the current time frame, it isn't appropriate to pound the table on anything," he says. He recommends that investors buy on dips until market sentiment improves.
UPSIDE FOR SALES? "It still is not profitable and does trade at a premium relative to the market," agrees ING Barings analyst George Godfrey. "It could still be vulnerable even though the next 12 to 18 months look outstanding for the company." With E.piphany due to report third-quarter results on Oct. 19, Godfrey projects revenues of $35 million and a net loss of $13.4 million, or 31 cents a share. That's up from second-quarter revenues of $25 million and a loss of $4 million (excluding a one-time charge for research and development and charges for stock-based compensation and goodwill amortization).
Godfrey thinks there could be upside on the sales number, which could provide a bounce. He has a buy recommendation and a $135 price target on the stock. Chappell, however, believes that even a positive earnings surprise wouldn't provide a meaningful boost to the stock in the current market.
Probably E.piphany's biggest threat is competition. Analysts give it credit for attracting more than 250 large companies to its customer base. And on Oct. 4, the stock got a pop from the company's announcement that it had signed an alliance with Sun Microsystems to jointly engineer products, which Sun's established sales and marketing force will promote. But while it stands out among companies providing software to analyze customer data, it will increasingly come head-to-head with CRM giant Siebel Systems (
SEBL
) as it expands into a fuller suite of customer-management tools. Eventually, E.piphany is likely also to encounter database software king Oracle.
COST-EFFECTIVE. Analysts believe there is room for both Siebel and E.piphany. And Serman says E.piphany has an edge because it uses the Web as a platform while Siebel is still getting up to Internet speed. "That gives E.piphany some running room," he says. But with the economy slowing, it will clearly be tougher for software and service companies to make big sales to large companies.
Serman thinks E.piphany will still be able to attract new customers since it can show that its software enables businesses to improve customer retention and reduce marketing costs. Although the software can cost $1 million to implement, "That could be justified spending in a recession," he says.
Maybe so. Siboni's vision is that in an economic slowdown, companies start to focus less on generating sales and more on generating profits -- which may mean dropping customers who aren't profitable to serve (see BW Cover Story, 10/23/00, "Why Service Stinks"). "We're going through a profound transition -- away from a sales-centric economy based on volume to a far more customer-centric economy that starts with understanding who the customer is first," he says. "You do have to focus on the better customers and keep them for a long time."
If E.piphany really has the tools companies need to help them do that, it could have a bright future ahead, once today's market clouds clear.
With Diane Brady in New York Edited by Beth Belton
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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