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 highfliers as
Finding the comfort zone, however, is pure guesswork. That's why investors should still be selective despite this week's B2B rebound.
VerticalNet closed Thursday at US$41.63, down from a 52-week closing high of about US$139, but up strong from a closing price of US$28 on April 14. On an intraday basis, VerticalNet has traded as high as US$181. Commerce One topped US$165 a share on March 9, but closed at US$55 Thursday. The company, which reported solid revenue growth, is up from a April 14 close of US$33, adjusting for a 2-for-1 stock split. Ariba closed at $165 and change March 9, and now trades at US$69.
Ariba, Commerce One,
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
For starters, the Nasdaq has hit a volatile period, and B2B Net stocks were among the first to be dumped by investors. After a year of hearing about how B2B was going to change the world, investors realized there was a lot of irrational exuberance in the market.
In addition, old economy companies such as 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 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."
Healthy shakeout
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 "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 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
Walsh said it also helps to have a well-heeled partner. VerticalNet has a deal with
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 midsized companies that need our help," said Walsh. "I'd say B2B has room for a lot of businesses. Stay tuned."
The comeback
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 US$2 million or more, depending on which forecast you care to compare.
"We have US$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.
Why did Wall Street suddenly get concerned about B2B valuations after driving shares through the roof for the first two months of 2000?
Although analysts and B2B execs aren't about to predict if the glory days will return, they do agree on what will determine the winners from the losers.
Did investors start poring over business models after B2B shares bottomed out last week? Hardly.
