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Slower growth for business apps

A recent stock slide is likely a result of Wall Street reacting to recent predictions that growth for the year will hover around 30 percent.

The glory days for enterprise resource planning stock are over.

Goldman Sachs and Morgan Stanley last week downgraded the ERP market, sending trading for such Wall Street darlings as PeopleSoft, SAP, and Baan plummeting in an ERP Black Friday.

Market giants SAP, PeopleSoft, and Baan all hit 52-week lows at the closing of the market and the downward spiral continued today. Even J.D. Edwards, a relatively stable company with strong growth, saw its stock slide almost 26 percent from the previous week.

"When a financial analyst downgrades, it says the love affair with the stock is going to end," said Jim Shepherd, analyst at AMR Research in Boston. "This market has a whole lot of investors who never heard of the space before. They were attracted by the astronomical growth rates. Now the market is coming back down to earth--they are starting to react. These stocks are still overvalued, so this is a necessary correction."

Analysts said the ERP market is also reacting early to global economic problems that sent the rest of the market into a tailspin today.

"These are all very strong companies with strong fundamentals," said Joshua Greenbaum, analyst at Enterprise Applications Consulting in Berkeley, California. "But there has been a fair amount of nervousness in the European market with regards to Russia's problems and the German election didn't necessarily help things. Gerhard Schroeder is not the pillar of stability that Helmut Kohl is."

Throw into that mix a slowing of the Latin American economies and the ongoing Asian market crises, and the reasons start to add up.

But Greenbaum said most of these troubled markets, like Asia and Latin America, are small portions of the enterprise resource planning market. While the troubles in Europe are sure to hit them somewhat, the stock slide is most likely a result of Wall Street overreacting to enterprise resource planning vendors' recent predictions that their growth for the year and most likely next year will hover around the 30 percent range. This is opposed to the 50 percent to 100 percent growth rates some of the companies were posting in recent years.

"Wall Street has had a poor understanding of software stocks in general," Greenbaum said. "Frankly, financial analysts running away from these investments, represents a herd of investment opportunities for the rest of us. God forbid these companies should grow at 30 percent."

In fact, AMR Research predicts the market will average growth of around 37 percent through the year 2003. Currently an $11 billion market, it is expected to be more than $52 billion in the next five years.

It's a prediction in which most industry analysts agree, killing Wall Street's fears that ERP growth is being driven by companies scrambling for a quick fix to their year 2000 ills. The truth is, these systems cost too much and take too much time to implement to ever be looked upon as quick fixes to anything.

"We haven't seen any real indication from the buying public that they are slowing down deals that are in progress, or that there are fewer companies that are starting the evaluation process," AMR's Shepherd said. "[Investment analysts] are looking at the fact that these guys aren't hitting 50 percent to 60 percent growth rates, which we have said weren't sustainable and weren't real. These stocks are still overvalued, so this is a necessary correction."

In fact, BT Alex Brown, which this morning downgraded SAP from a buy and PeopleSoft from a strong buy to market performers, and J.D. Edwards from a strong buy to a buy, said the stock downturn is a reaction to market forces bringing the ERP industry to a realistic level.

"Despite formidable near- to intermediate-term risks, the ERP sector remains a huge market with good growth prospects, in our opinion" the report stated. "The long term growth prospects for ERP are still exemplary by most standards. The key, in our view, is to focus on stock selection."

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