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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 | | APRIL 12, 2001 STREET WISE By Amey Stone B2B by Another Name, Any Other Name The term may be anathema to investors, but all providers of e-commerce software won't disappear. Longer term, some survivors will rule
Time to retire that notion. Losing money and running through remaining cash, stocks of pioneers like Ventro (VNTR ), now at 50 cents a share; VerticalNet (VERT ), at $1.50; and Internet Capital Group (ICGE ), at $1.75, are trading at levels that show Wall Street has essentially given up on them. "People have realized that you can't just put up a system and expect to change an industry," says Internet strategy consultant Peter Cohan. TARNISHED CAREERS. Even the more promising B2B model -- companies setting up private exchanges to link up with suppliers on the Internet -- has been a big disappointment to investors lately. These complex online procurement systems are often taking longer to set up and proving slower to reap benefits customers expected. Striking a blow to B2B, Nike (NKE ) recently attributed part of its earnings shortfalls to delayed implementation of a system it purchased from i2 Technologies (ITWO ). Consultant Cohan sees a backlash growing against software outfits that pushed online exchanges. Their careers tarnished by backing these efforts, many execs "are just delighted not to have to deal with this for a while," he says. So it's over, right? Not so fast. True, the first week in April brought a slew of warnings from e-business software companies, as sales seemed to dry up in the first quarter. A leading procurement software company, Ariba (ARBA ), revealed on Apr. 2 that first-quarter sales would be only half of what Wall Street expected. It's laying off 700 people and called off its merger with Agile Software (AGIL ). Commerce One (CMRC ) and i2 also warned that they would miss revenue targets that week, sending shares plummeting. UNAPPRECIATED GEMS? But while these announcements seemed to be another nail in the B2B coffin, there's still hope for many of these...let's just call them software companies. Some have been around for decades and will still benefit as more and more business is inevitably conducted over the Web -- even if it isn't even close to meeting Wall Street's timetable. Gartner Group estimates that this kind of B2B Internet commerce -- not just online exchanges, but any sale of goods where the order is placed on the Web -- will reach $8.5 trillion in 2005, up from $433 billion in 2000. And beleaguered analysts are starting to point to survivors as good buys for when the tech sector eventually turns around. On Apr. 9, Wit Soundview Chief Strategist Arnie Berman included business software companies, Siebel Systems (SEBL ), i2, BEA Systems (BEAS ), and Peregrine Systems (PRGN ) on his "everyone will want to own 'em" list of technology stocks that long-term investors should sock away now for the market recovery. "We've been focusing on companies that we believe are going to be around for the long haul," says John Ederer, analyst with Pacific Growth Equities. In his coverage area, he recommends i2 as "one you should buy now, hold for 12 to 18 months, and you'll end up with a great return." He also likes Agile, which makes software that helps companies collaborate with suppliers on product design. While it will take the company a few quarters to adjust now that its merger with Ariba is off, he thinks it'll be a long-term winner. Siebel is another company he points to as a clear survivor that has held up well in this difficult environment. STRONG BACKBONE. James Governor, an industry analyst with research firm Illuminata, calls it "a return to the big guys." He thinks Siebel, PeopleSoft, and i2 will hold up because they already have a base in so many companies, and it's clear that they're big enough to survive these tough times. "For better or worse, you know they're going to be around in the next few years, which is increasingly important," he says. The analyst includes Germany's SAP (SAP ) in this group, primarily because its success in the early 1990s selling then-hot enterprise resource planning (ERP) software has given it a backbone at many companies from which they can add new applications without the expense of integrating different software packages. In this environment, "It's not about vision, it's about execution," says Governor. Meantime, continuing consolidation in the sector as weaker players are forced to sell out means "strong companies are going to get stronger," says Governor. "They're going to build market share and become increasingly dominant." He points to recent smart acquisitions, including Peregrine Systems' Mar. 12 announcement that it's buying Extricity, and Vitria Technology's (VITR ) announcement on Mar. 26 that it's buying XMLSolutions. LOOKING FOR THE UPTURN. Noting that this has been the worst environment for business-software companies in recent memory, Epoch Partners analyst Mark Verbeck issued a report on Apr. 9 titled "Software Took It on the Chin but Will be First to Bounce Back". He argues that earnings will rebound quickly once corporations start spending again. "Therefore, we think software-company shares should be purchased at the first indication of improving economic conditions." That could take a while. Software companies have alarmed investors by reporting that they can only guess at future revenues or when business might pick up. For investors, the unraveling of stock prices may continue for a few more months. Yes, corporations are postponing major online-software projects, but eventually they will have to go ahead with them. Besides, efficiency becomes more important in an economic downturn, points out Governor. "There's more architecture buildout required," he notes. "Some companies might not want to hear this, but it still needs to be done." All the more reason why smart investors will want to keep an eye on B2B -- oops, make that collaboration software.  Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column. Questions or comments? Join in the discussion at our Ask Amey Stone interactive forum Edited by Douglas Harbrecht  | | |
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