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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | DECEMBER 21, 2000 STREET WISE By Amey Stone A "Beacon" in the B2B Wasteland webMethods' software lets incompatible computer systems talk to each other -- a neat trick that's keeping its stock above water
Where investors went wrong was betting that B2B e-commerce would take place on independent marketplaces set up by third parties. That model didn't work, as is most clearly indicated by the imminent closing of pioneer Chemdex, a marketplace for the exchange of laboratory supplies (see BW Online, 12/19/00, "Crawling from the Dot-Com Wreckage"). LEAPING THE LANGUAGE BARRIER. Instead of using independent exchanges, traditional companies are building their own private marketplaces. The idea: to automate transactions between their customers and suppliers, thus saving money while streamlining the process and building stronger relationships. For traditional bricks-and-mortar companies, "It's not such a leap as participating in independent markets," says Mary Cicalese, a senior analyst with Jupiter Research. B2B e-commerce is taking off in the so-called internal marketplaces, closed exchanges of like-minded players. That's also where investors can find opportunities. One company clearly benefiting from the growth of these private exchanges is webMethods (WEBM). This Fairfax (Va.) company specializes in so-called business-integration software, which allows separate computer systems -- often using different programming languages -- to communicate with each other. webMethods' products allow different divisions within the same company to communicate. But where webMethods distinguished itself from other integration- software companies is in crossing corporate firewalls to allow separate companies to link up electronically. Now, most companies fax orders, which are then keyed in manually -- a process with an error rate of approximately 20%, according to webMethods Chief Executive Phillip Merrick. HOT PROSPECTS. Years ago, companies spent millions to link with suppliers on electronic data interchange (EDI) systems. "They're not going to toss them away," says Jupiter's Cicalese, because webMethods' system allows them to open up those legacy systems to the Internet. Such integration software represents a potentially huge market. Jupiter estimates that in 2003, companies will invest $350 billion in Internet infrastructure, and 75% of that will go toward system integration. Cicalese estimates $153 billion was spent in 2000. "Business is on fire," says Merrick. For its fiscal second quarter posted Oct. 25, the four-year-old company lost $64,000, breaking even on an earnings-per-share basis for the first time -- a full year sooner than analysts expected, Merrick says. Revenues grew to $46 million in the quarter, up from $35 million the prior quarter and $11 million for the same period a year earlier. Even if the economic slowdown worsens, webMethods will still be able to sell its software, since it gives customers good bang for their buck, says Tim Klassel, an analyst with Thomas Weisel Partners. One of his firm's favorite software stocks, webMethods, gets a strong buy rating and has a $200 price target. "What we really like, and why we think it's a little safer than a lot of other software companies, is that the return on investment is very high," Klassell says. TECH SURVIVOR. webMethods held its first all-day meeting with analysts on Dec. 14, reassuring investors shell-shocked by the market's performance of late. Merrill Lynch analyst Chris Shilakes titled his research note on the analyst meeting Comfort Food on a Rainy Day and called webMethods "a beacon of hope in the sea of tech-related pre-announcements of the last few weeks." First Union analyst Jason Maynard reiterated his strong buy rating and $100 price target based on the day's events. He estimates webMethods will do $305 million in sales by 2002. Given the carnage in the tech sector, the stock, now around $75 a share, has held up relatively well. Yes, it's well off its February, post-IPO high of $336, but it's above its mid-April low of $44 1/2. But a word of caution: With nearly a $4 billion market cap, it's still a pricey stock by any measure. And if investors continue to be wary of high-priced, hot-growth tech stocks, it's vulnerable. It also faces mounting competition from such companies as Vitria Technology (VITR) and TIBCO Software (TIBX), which also sell integration software. webMethods, however, has "first-mover advantage," since it was one of the pioneers in providing software that worked between companies rather than just between different divisions of the same company, according to Klassel. "It's a large market that has only been penetrated a little bit so far," he says. "It has a lot of room to run. We're still in the early days." RIGHT PLACE, RIGHT TIME. Another risk worth noting is the software systems that webMethods links with eventually could learn how to integrate with each other without the help of its products. Again, Klassel expects little near-term risk. "I can't really see SAP and Oracle and Ariba and Commerce One ever getting together and deciding on a standard," he says. You may have a chance to buy into webMethods at a cheaper price in the coming weeks. And as one of the up-and-comers in the software world, it's worth following. B2B e-commerce will eventually be very big, despite its false start in 2000. And webMethods is in a good spot to benefit.  Stone is an associate editor at Business Week Online Edited by BETH BELTON  | | |
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