Last week, B2B stood for boom to bust. This week, B2B is bust to boom. Somewhere, there's a solid trading range for such business-to-business, e-commerce high-flyers as Commerce One (Nasdaq: CMRC), VerticalNet (Nasdaq: VERT) and Ariba (Nasdaq: ARBA).
B2B stocks: Now what?
Finding the comfort zone, however, is pure guesswork. That's why investors should still be selective despite this week's B2B rebound. A week of gains for B2B stars doesn't erase a month of carnage, but it sure eases the pain.
'A lot of these companies were trading at 100 to 200 times revenue. In 1996, 10- to 15-times revenue was considered outrageous'
-- analyst Patrick Walravens
Ariba, Commerce One, PurchasePro.com (Nasdaq: PPRO), FreeMarkets (Nasdaq: FMKT) and VerticalNet, collectively known as "B2B enablers," have held up better than other B2B companies. Single vertical companies, which focus on one industry, have suffered even larger losses. Industry-specific B2B companies, including eMerge Interactive (Nasdaq: EMRG) (cattle), Neoforma (Nasdaq: NEOF) (medical supplies), Sciquest.com (Nasdaq: SQST) (lab equipment) and Ventro (Nasdaq: VNTR) (life sciences), have rebounded, but to a lesser degree.
The balloon was bound to pop. "A lot of these companies were trading at 100 to 200 times revenue," said Patrick Walravens, an analyst at Lehman Brothers. "In 1996, 10- to 15-times revenue was considered outrageous."
What went wrong
Why did Wall Street suddenly get concerned about B2B valuations after driving shares through the roof for the first two months of 2000?
'For a year, B2B was a land grab. We're now reaching the end of the land grab and all the flags are in the ground'
-- Patrick Walravens
In addition, old economy companies such as General Motors (NYSE: GM), Ford (NYSE: F), Chevron (NYSE: CHV), Wal-Mart (NYSE: WMT), Proctor & Gamble (NYSE: PG) and Boeing (NYSE: BA) announced B2B ventures. These industrial giants are refusing to pay middlemen hefty transaction fees when they have all the clout they need for their own exchanges.
While investors worried about transaction revenue, a glut of B2B wannabes went public. No revenue? No problem, just mention B2B and your IPO will do fine. The glut eventually took its toll as investors became overwhelmed with questionable investments.
"For a year, B2B was a land grab," said Walravens. "We're now reaching the end of the land grab and all the flags are in the ground."
B2Bs were set to explode -- all the sector needed was someone to light the fuse. Enter Safeguard Scientifics (NYSE: SFE). Safeguard, an Internet incubator, said April 10 it would focus on Internet infrastructure. The timing couldn't have been worse. Although Safeguard's announcement wasn't news -- the company had been switching its strategy since January -- the perception that Safeguard was bailing on B2B was all investors needed.
"Safeguard is constantly evolving and has always invested in infrastructure," said Joseph Garner, an analyst at Emerald Research. "If Safeguard made the announcement in December it wouldn't have been news."
Mark Walsh, CEO of VerticalNet, said the B2B shakeout last week was a "spasm of interest in the new new-thing." Walsh said that the shakeout in B2B shares could even be healthy in the long run.
"Investors will have to look at the business model," said Walsh. "I think it's a very positive thing to physically drill down into business models to see if there will be profits three, five and 10 years out."
Walsh downplayed the comparisons to business-to-consumer (B2C) stocks, which have been leveled. The B2B sector is large enough to support more players.
According to International Data Corp. the B2B e-commerce industry is expected to grow from $200 billion in 2000 to $2.5 trillion in 2004.
"I think that with all the B2B attention in the last year, that the market took its eye off the ball in terms of quality," said Garner.
FreeMarkets Chairman and CEO Glen Meakem agrees. "I think there's been so much hype in the B2B space, and there have been frankly some very low quality companies that have gotten huge market caps, and on the surface it seems like they're doing well. Suddenly they're getting hammered, we're all getting hammered, but I think the market needs to sort out the quality companies from the air," said Meakem.
Picking the winners
Although analysts and B2B execs weren't about to predict if the glory days would return, they did agree on what would determine the winners from the losers.
Once investors catch their collective breath, analysts said some common sense will return to the B2B market.
According to Walravens, winning B2B companies will have three major traits: They will sell the picks and shovels for the B2B rush, be connected at the hip with Fortune 500 companies, and automate processes for industry partners.
As for the flap over transaction revenue, Walravens said he thinks the worries are overblown. Transaction revenue wasn't going to last, he said. Besides, the likes of Oracle (Nasdaq: ORCL) and i2 Technologies (Nasdaq: ITWO) have proven the software business can be lucrative. In addition, there's no guarantee that high-profile B2B joint ventures between industry giants -- many of which hate each other -- will work.
Walsh said diversified revenue streams will also determine winners. VerticalNet has advertising, licensing, sponsorship and transaction revenue, and spreads its focus across multiple verticals. VerticalNet's diversification strategy keeps it out of the way of big old-economy companies that will cut out the middleman.
"There are thousands of mid-sized companies that need our help," said Walsh. "I'd say B2B has room for a lot of businesses. Stay tuned."
Did investors start poring over business models after B2B shares bottomed out last week? Hardly.
Wall Street is playing momentum and B2B shares are back in favor. The trading action this week indicates that B2Bs may have bottomed out.
Positive earnings surprises also don't hurt. I2, Commerce One, PurchasePro and FreeMarkets all topped estimates this week.
FreeMarkets' losses were less than expected, while revenue beat most analysts estimates by $2 million or more, depending on which forecast you care to compare.
"We have $5.4 billion of volume behind us, the market's a $5 trillion market," said Meakem. "We feel strongly the right thing to do is not overreact to the (stock) market. The market is great at overreacting in the short run, and we're great at running a business. So we're focused on growing this business as fast as we can."
Sergio Non contributed to this report.