We interrupt earnings season to bring you the latest installment of the Rule Breaker's journey into the world of business-to-business e-commerce.
Up to this point we've employed only the first two Rule Breaker Criteria in narrowing the field down to three candidates -- Ariba (Nasdaq: ARBA), i2 Technologies (Nasdaq: ITWO) and USinternetworking (Nasdaq: USIX).
All three business models look like top dogs and first-movers in important emerging industries. More importantly, sustainable competitive advantages of the kind that don't come along too often appear to be within their grasp. True, the world will have to take shape according to the vision these companies have set out before these competitive advantages can be fully realized, but if these companies can make it happen...
The Next Two Breaker Screens
Tonight, we'll look at Rule Breaker Criteria three and six:
- Excellent past share appreciation, measured by a relative strength of 90 or higher.
- A significant constituent of the financial media is recently on record for calling it overvalued.
One thing that separates the Rule Breaker approach, in my mind, from more typical high-growth, small-cap approaches, is that we're not trying to find companies before the market does. On the contrary, we believe that the collective market mind knows better than we ever could which nascent business plans might be successful and which are likely to fizzle.
But, happily, we believe that the deceptive lure of short-term timing leads the mass of market-makers to underestimate the value that our Breakers will eventually generate -- year after dominant year -- when they finally turn the corner. We don't. That's our edge.
And this is what these next two Breaker criteria are all about. The relative strength hurdle confirms that a broad swath of skilled business watchers sees great potential. Likewise, the overvalued requirement confirms that the habitually shortsighted financial mainstream has fallen into our trap again.
Building a Useful Comparison Group
So, with this perspective top of mind, let's move toward some numbers. To gain badly needed perspective, I added a bunch of additional companies to the comparisons, some direct competitors to the final three candidates, others just promising B2B business models in different niches.
CommerceOne (Nasdaq: CMRC) competes most directly with Ariba, although their vision is more tied to the most powerful of global business buyers -- influencing them, sharing in the ownership of the their mega-vertical markets, and reaping a more lucrative, long-term commission windfall.
Manugistics (Nasdaq: MANU) competes directly with i2 Technologies in supply chain software; Corio (Nasdaq: CRIO) and Breakaway Solutions (Nasdaq: BWAY) go head-to-head with USinternetworking in the emerging Application Service Provider (ASP) business.
PurchasePro.com (Nasdaq: PPRO) is similar to Ariba, but more focused on small to midsize businesses without the budget to implement Ariba Buyer software. VerticalNet (Nasdaq: VERT) and FreeMarkets (Nasdaq: FMKT) are also prominent marketplace builders with expertise in industry-specific content and online auctions, respectively.
To round out the field, I added Oracle (Nasdaq: ORCL), SAP (NYSE: SAP), and IBM (NYSE: IBM), the dominant players among large-cap companies with visions of B2B grandeur. Also, Descartes (Nasdaq: DSGX) and BEA Systems (Nasdaq: BEAS) are two companies I like and that compete tangentially with others in the list, but that didn't make my previous Rule Breaker cuts.
Excellent Past Share Appreciation
All stock prices are as of market close on Wednesday. In addition to the one-year view, I also pulled prices from 5/1/00 -- just before the latest round of earnings releases -- to see the market impact of recent developments.
One-year relative strength ratings were pulled directly from Thursday's Investor's Business Daily, so the two sets of numbers should "line up" (Thursday's ratings are based on Wednesday's closing prices). Corio debuted as a public company only this week, so it is excluded here.
Return:
Closing Price On: One Since IBD
7/26/99 5/1/00 7/26/00 Year 5/1/00 RS
ARBA 23.88 83.94 122.25 412% 46% 97
CMRC 8.29 64.94 46.88 465% -28% **93
ITWO 15.63 124.63 130.44 735% 5% 98
MANU 13.50 42.88 60.52 348% 41% 97
USIX 14.44 23.00 16.38 13% -29% 29
BWAY 20.19* 33.69 29.83 90% -11% 79
PPRO 17.42* 32.13 46.12 165% 44% 90
VERT 22.63 56.88 56.75 151% 0% 85
FMKT 280.00* 77.06 52.56 -81% -32% 2
BEAS 6.25 50.63 53.44 755% 6% 98
DSGX 4.39 39.50 33.00 652% -16% 99
ORCL 17.50 79.69 76.75 339% -4% 96
SAP 34.04 50.87 56.56 66% 11% 79
IBM 122.44 111.87 110.31 -10% -1% 52
Nasdaq 2,619 3,958 3,988 52% 1%
* At IPO
** As printed in IBD, although I think
it should be more like 99.
At this point, one of our three candidates drops out. USinternetworking is up only 13% for the past year, versus 52% for the Nasdaq as a whole. Relative strength of 29 means that over 70% of Nasdaq stocks performed better.And more recent results for both USinternetworking and Breakaway show little traction for the ASPs. Wall Street is clearly not sold on this model yet. Too bad, really, because I love it, but that's why we have Breaker criterion three, I guess -- to prevent Fools like me from getting carried away when the market doesn't get carried away enough.
With the exception of the two ASPs, we see a pretty stellar group of returns, with perhaps the greatest surprise being Oracle. While sexy newcomers PurchasePro and VerticalNet struggled to meet the 90% relative strength threshold on the year, Net-software-king wanna-be Oracle sailed past it.
Among the companies besting the one-year relative strength test, Ariba and PurchasePro have the most recent momentum (Manugistics dropped 12% on Thursday). The latest round of earnings have led to a market preference, it appears, for horizontal marketplace models that grow out of sticky procurement software.
Financial Media Cry Overvalued!
I did a quick Google search and a search of Barron's online and came up with no juicy quotes to go with Ariba or i2 Technologies. In fact, Ariba appears to be widely regarded as the "real thing" by the mainstream financial press. While I uncovered some concern about PurchasePro's hefty valuation, I couldn't find anything similar on Ariba or i2.
Bummer. Looks like we have our first Breaker strike against the two finalists. Still vigilant, but short of a good quote, let's look at some more numbers:
Annual
Rev Growth Market Cap
$M Q-Q Y-Y $B xRev
ARBA 161 101% 578% 28.8 179
CMRC 124 79% 1392% 7.3 58
ITWO 750 30% 85% 25.5 34
MANU 163 16% 29% 1.7 11
USIX 68 47% 292% 1.6 23
BWAY 71 94% 691% 1.1 15
CRIO 9 93% 513% 0.7 76
PPRO 18 109% 843% 1.5 83
VERT 96 95% 1408% 4.6 48
FMKT 43 79% 363% 1.9 45
BEAS 532 3% 80% 20.0 38
DSGX 45 11% 21% 1.3 29
ORCL 10,130 38% 15% 218 22
SAP 5,455* 27% 19% 124 23
IBM 86,325 12% -1% 195 2
* SAP Revenue in Euros
For year ending:
3/31/00 CRIO
4/30/00 BEAS, DSGX
5/31/00 ORCL, MANU
6/30/00 All others
Clearly, if we stick to the overvalued requirement, i2 is eliminated. It's hard to imagine our beloved value hawks getting too excited about i2 trading at 34 times annual revenue, especially with Ariba valued at five times this figure. i2 is an established, profitable, software power closing in on the one billion mark for annual sales. Given this scenario, 85% year-on-year revenue growth is pretty impressive, especially considering i2's prospects going forward. It may not be enough to interest the Boring Portfolio, but, alas, it's not Rule Breaker material.And then there was one -- Ariba. It clears the first three Breaker hurdles cleanly and has the goods to be considered overvalued, once the Q2 earnings shine wears off. Certainly the folks over in the CommerceOne camp will tell you that Ariba can't possibly be worth three times their favorite.
Your Turn:
This last thought leads to the real question arising out of the exercise so far: Is Ariba worth three times CommerceOne? If it is, then I'm starting to smell a Rule Breaker. If not, we got a faker.
The folks at Business 2.0 magazine ran a nice comparison piece on these two companies in the July 25 issue. Out on the Ariba discussion board, there are some additional rambling thoughts from yours truly. In response to my post, Fool nphrn poses some excellent questions on the subject. Let's see if we can get to the bottom of them. Until then...
Buster
