Window shopping on Wall Street again has taken on an air of Rodeo Drive, as pricey business-to-business Internet stocks become the latest chic investment while consumer e-commerce stocks are becoming passe.
Business-to-business Web site operator PurchasePro.com, for example,
recently was trading at 503 times its 1999 revenues. Internet
procurement company Commerce One was not far behind, trading at a multiple of 424 times its 1999 revenue, according to research by Lehman Brothers based on Friday's closing numbers.
Business-to-business companies typically serve as the middlemen in
transactions between two or more businesses. The industry has three general
business models: auctions; distribution and exchanges that match buyers with
sellers for such commodities as paper; or chemicals.
Business-to-consumer companies generally sell directly to consumers and
carry lower price-to-revenues multiples. Online auctioneer eBay,
often cited as an expensive stock, carried a multiple of
105 times its 1999 revenues.
"Fifty to 100 times revenue are pretty rich valuations," said David
Gremmels, an analyst with SG Cowen Securities.
Many Internet companies do not have profits that can be used to determine a
price-to-earnings ratio--a more traditional method of determining a stock's value. As a result, many analysts use revenues to gauge the value of
In recent months investors have become infatuated with companies that are
involved in business-to-business transactions. This is mainly because the sector is expected to experience phenomenal growth. Forrester Research, for example, estimates the business-to-business
market will soar to $1.52
trillion in 2003 from $131 billion this year.
Henry Blodget, an analyst with Merrill Lynch, noted in a research report last
week that investors will continue to gradually move some of their money
from business-to-consumer stocks such as eBay or Amazon to
business-to-business stocks next year.
Investors are placing a premium on companies involved in business-to-business transactions, while business-to-consumer companies carry relatively tame valuations.
|Company ||Ticker ||Price 12/3/99 ||Revenue multiple**|
|Business-to-business* || |
|PurchasePro.com ||PPRO ||$145.13 ||503.4|
|Commerce One ||CMRC ||$336.94 ||424.2|
|Ariba ||ARBA ||$204.63 ||194.6|
|VerticalNet ||VERT ||$96.00 ||181.3|
|Chemdex ||CMDX ||$82.25 ||118.1|
|Business-to-consumer || |
|Autobytel.com ||ABTL ||$14.25 ||4.1|
|eBay ||EBAY ||$178.75 ||104.8|
|Barnesandnoble.com ||BNBN ||$18.06 ||16.9|
|CDNow ||CDNW ||$14.25 ||2.3|
|Amazon.com ||AMZN ||$86.56 ||21.6|
* Chart represents a sampling of the more popular companies and does not rank
the highest valuations in each sector.|
** Price-to-revenue multiples are based on revenues for calendar year 1999.
Business to consumer "appears to be moving from a period of hyper-growth into long-term growth," Blodget said.
Meanwhile, business-to-business stocks are expected to pick up that slack.
"The valuations for [business-to-business] stocks are justified when you look at the industry's projected growth," said Brian Oakes, a Lehman Brothers analyst. He added that the business-to-consumer industry is expected to grow by only a few hundred million dollars.
Also driving demand for business-to-business stocks is the relatively meager number of publicly traded companies.
"There are only a handful of [business-to-business] stocks and hundreds of [business-to-consumer] companies,"
Some other business-to-business companies include procurement software
provider Ariba, which had a price-to-revenues multiple of 195; online
laboratory and equipment seller Chemdex, with a multiple of 118; and Web
site and auction operator VerticalNet, with a multiple of 181.
By comparison, even Yahoo could be considered a cheap stock, with its multiple of 112.
Analysts, however, caution against comparing stocks from the two sectors.
"The valuation metrics are the same for both--revenue momentum, ability to
communicate a vision and crisp execution," said SG Cowen Securities' Gremmels. "But there are
more differences than similarities."
He noted that the share price in business-to-consumer stocks are often
affected by subscriber growth and site traffic, not just revenues.
On the other hand, business-to-business stocks generally do not react to increases in site traffic.
Gremmels also noted that the business-to-business industry tends to have
more business models and vertical markets, such as paper or agriculture,
than the consumer Internet market.