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ANALYST WATCH: B2B investors get reality check

Business-to-business e-commerce stocks have contributed more than their fair share to the Nasdaq composite's recent skid. More bad news came Friday when Prudential Securities downgraded three leaders in what was once the hottest sector around.

Before delving into the carnage of the past three weeks, it's important to put the rise and fall of B2B stocks such as Commerce One and Ariba in perspective.

Ariba (Nasdaq: ARBA), for instance, was trading at 30 1/2 in June and found itself struggling to garner any attention while the rest of the investing world was immersed in the .com craze of last summer.

Fast-forward nine months to find its stock hitting an all-time high of 366 11/16 earlier this month with a 2-for-1 stock split in between.

The story's pretty much the same for Commerce One (Nasdaq: CMRC) and i2 Technologies (Nasdaq: ITWO), two of the fastest-growing B2B players on Wall Street.

For the past three or four months, B2B was the buzzword on the Street. Everyone wanted to buy into the B2B madness, much like they did in the early phase of .com mania and the short-lived infatuation with Linux stocks.

First signs of sanity

On Friday, Prudential Securities analyst Doug Crook finally threw the brakes on the B2B train when he downgraded Commerce One, Ariba and i2 while slashing the 12-month price targets on two of the three.

Crook cut all three stocks to an "accumulate" rating. He cut Commerce One's 12-month price target from $250 a share to $200 and lowered i2's from $200 to $150 a share.

In a research note, Cook said that there has been a change in "perception" that the B2B newbies will enjoy transaction fees across trade exchanges.

"Increased competition is going to spoil the ability of these companies to demand equity in the trade exchanges and revenue sharing," he said.

He also said the B2B space has hit an "inflection point," whereby there will be a multiple compression.

Those who've held shares in the stock would argue that they hit that "inflection point" about three weeks ago.

Since peaking at 366 11/16 during the first week of the month, Ariba shares have nearly been cut in half in the past three weeks. Following Friday's downgrade, Ariba shares plunged 36 3/16, or 16 percent, to 183 13/16.

Commerce One shares also peaked at 331 earlier this month but fell to 37 1/4, or 21 percent, to 136 1/16 Friday. i2 shares shed 30 1/2, or 24 percent, to 98 1/2 Friday after hitting a 52-week high of 223 1/2 earlier this month.

Despite the recent pullback in these stocks, Needham & Co. bucked the trend Friday by starting Commerce One and Ariba with a "buy" and "strong buy" recommendation, respectively.

While no one's ready to write these stocks off, investors are hoping this sector doesn't go the way of its business-to-consumer brethren or, God forbid, the direction that most e-tailing stocks have gone in the past three months.

There's plenty of money to be made in this market, as much as $1.5 trillion by 2003 according to data research firms. But a good chunk of those sales are going to be snared by the big boys such as IBM Corp. (NYSE: IBM) and Oracle Corp. (Nasdaq: ORCL).

To compete with those companies, it's quite possible that two or more of these smaller companies will have to team up to take on Big Blue or the monster of Redwood Shores.

We're already seeing that with the recent $9.3 billion merger between i2 and Aspect.

Meanwhile, expect these stocks to sputter for a while unless they're able to shatter analysts' estimates in the next few quarters.