And you thought Amazon.com was a hot stock. Wait until investors catch on to the next big Internet craze.
That’s the pitch that analysts, chat rooms and squawk boxes make for investing in business-to-business, or B2B, companies. Stock in such firms as Chemdex Corp., FreeMarkets Inc., Ariba Inc., Commerce One Inc., and VerticalNet Inc. soared last year on the hope that they would show corporate America how to buy and sell on the Internet.
So great is investor lust that at least 25 business-to-business companies are expected to go public this year.
Then there are CMGI Inc. of Andover, Mass., and Safeguard Scientifics Inc. and Internet Capital Group, among the public holding companies that invest in business-to-business firms.
Just about everybody agrees that the potential is huge. By 2003, companies are expected to sell $1.3 trillion in business goods on-line, up from an estimated $109 billion today, according to Forrester Research of Cambridge, Mass.
Business-to-business companies stand to profit in several ways. They can act as brokers, nabbing a percentage of each on-line sale. They can help other companies set up Web sites where goods can be sold. They can earn revenue by letting vendors advertise on Web sites set up as central marketplaces for a specific industry. Think Amazon for industrial boilers, steel, oil, laboratory equipment, office supplies and just about anything else a business needs.
The market is estimated to be three to 10 times as big as the business-to-consumer market, where Amazon plays. But for individual investors, the risks are at least as steep as the rewards.
For one thing, the numbers that rise into the trillions represent the potential total sales for business-to-business companies, not the profits. At best, business-to-business companies can hope to get a sliver–10 percent as a broker’s fee at most–of that bigger number.
Despite that, the stock market is so whipped up about business-to-business companies that some are valued as a Fortune 500 firm, even though most are not making any money yet. One that is expected to go public soon, b2bstores.com Inc. of Long Beach, Calif., does not even have revenues, let alone profits.
Internet Capital Group, for example, is worth $35 billion in the stock market, in the same league as Anheuser-Busch Inc. and Charles Schwab Corp. So far, ICG’s investments in business-to-business companies total $500 million, meaning these investments will have to generate gigantic returns for ICG to live up to the promise built into its stock price.
“At this point, the valuations of business-to-business companies are just mind-boggling,” said Vish Krishnan, a professor at the University of Texas who studies the business-to-business industry. “The market is probably just betting that at this point, since we don’t know who the winners are going to be, let’s just buy them all.”
Jim Marks, who heads e-commerce research for Credit Suisse First Boston, agreed.
“You’re going to see a lot of disappointment,” Marks said. “There are such huge expectations baked in, and you’ve got situations where almost by definition not everyone can succeed.”
Even so, plenty of true believers remain.
Paul Cook, who manages the Munder NetNet Fund, which rode technology to a 175 percent gain last year, thinks investors are foolish to worry about earnings at this point.
“I think the B2B opportunity is underestimated currently,” he said. “You cannot look at these companies the way you would a General Electric.”
He and others think that at least a few of the current crop will grow into big players.
“This is, in fact, the beginning of a brand-new economy, just as there was a new chemical industry at one time and people were wondering about a little company called DuPont,” said Stephen J. Andriole, chief technology officer for Safeguard Scientifics, which owns stakes in VerticalNet and about 15 other business-to-business companies. “Can they all be successful? Of course not.”
But unlike those who see a speculative bubble, Andriole said consolidation eventually will help keep stock prices aloft as winners acquire the less successful.
“People write about the Internet bubble bursting,” he said. “We just don’t see it.”
Andriole is banking on huge profits for at least some business-to-business companies once managers see how quickly they can boost sales and eliminate costs and paperwork via the Internet.
Robert C. Hammerton, director of marketing at GalvPro, a steelmaker in Jeffersonville, Ind., for example, got 160 bids in three days after posting goods for sale on MetalSite, a marketplace for the metals industry that is 44 percent owned by Internet Capital Group.
Normally, it takes weeks for GalvPro to net a new customer.
“What this auction process allows you to do is put steel out there and then let the customer find the steel,” Hammerton said.
Even though industry seems to be migrating to the Net, business-to-business companies come with plenty of investing risks.
Eric Upin, an analyst with international investment banker Robertson Stephens, says investors need to consider which companies are growing fastest, which boast managements with significant backgrounds in the industries they focus on and which are backed by prominent venture capitalists.
He likes Chemdex, a Web marketplace company based in Mountain View, Calif., because it has aggressively pursued the life sciences and health-care industries.
Upin’s firm has business relationships with Chemdex, which is not unusual in the industry and is something that investors need to be aware of.
The future of business-to-business stocks is so uncertain that the shares are highly volatile. FreeMarkets, an on-line auctioneer of industrial products based in Pittsburgh, for example, has fallen more than 45 percent this year following news that General Motors Corp. was ending its relationship with FreeMarkets and was going to do business with Commerce One instead.
Short-term volatility is not the only risk. Big companies may decide to do the work themselves, shutting out new e-marketplaces.
“Big corporations can virtually dictate the fortunes of some of these companies by being suppliers and customers to these marketplaces or by staying out of them,” said Krishnan of the University of Texas.
It is also too early to count out established software companies such as Oracle Corp., which is helping the Ford Motor Co. put all its suppliers on-line, and SAP AG, which recently announced a big business-to-business push.
“SAP is in an extremely strong position and its valuation does not reflect that,” said Haim Mendelson, professor of information systems and management at Stanford University. “I think the risk in buying SAP is much lower than the risk in buying (for example) Ariba, because Ariba’s stock price fully reflects the potential of buying the B2B market.”
