RealTime IT News

ISDEX Players Rise From B2B Ashes

After months of stumbling through ever-deeper losses, internet.com's Internet Stock Index is drawing a bead on the black.

Riding a June comeback among tech stocks, the ISDEX closed trading Wednesday at 776, leaving it down 9.8 percent for the year. Perhaps not cause for celebration, but given that the ISDEX was down 26.4 percent for the year through the end of May, getting the deficit out of double-digit territory in such relatively short time is positively uplifting.

With a gain of 22.5 percent to date in June, the ISDEX is firmly on track to post its first monthly advance since February, when it closed at 992, or 15.3 percent above the Dec. 31 closing mark of 860.35.

This week was a particularly strong one for the ISDEX, coming as it did after a mid-month slump that saw the index fall 5.3 percent in the week of trading ended June 14 - a period in which only nine of the 50 ISDEX member stocks posted gains.

For the week ended Wednesday, the ISDEX rose 6.7 percent, with 30 stocks gaining. Leading the charge were B2B e-commerce software infrastructure provider Ariba , up 30.9 percent, and BroadVision , a maker of personalized e-commerce applications, which rose 27.1 percent.

What we're seeing is the beginning of a resurgence by some B2B e-commerce stocks in the wake of the spring meltdown. The sector was particularly hard-hit because so many B2B companies were highly overvalued, trading at revenue multiples well into the triple digits.

The first phase of this process was the crash. Now comes the sorting out, in which investors start putting money into the stocks of companies they believe will be the eventual winners in the B2B space. Ariba and BroadVision are among the top-rebounding stocks in the sector, and in fact lead the ISDEX for the month with gains of 80 percent and 75.6 percent, respectively.

Having said that, I should point out that both are still overvalued relative to other stocks in their sector. Ariba, with a market capitalization of $22.5 billion, trades at 242x trailing 12 months' revenue of $92.6 million. Further, ARBA losses are accelerating. The company, which specializes in Web-based procurement software, had a net loss of $126 million, or 70 cents per share, in Q1.

BroadVision is a relatively safer bet, at least by the numbers. With a market cap of $15.4 billion, BVSN is valued at 97x TTM revenues of $158.5 million. The company also has been profitable for the past five quarters, though not dramatically so: Net income in Q1 was $10 million, or 4 cents per share.

Neither, however, are as attractive as supply-chain management leader i2 Technologies , another ISDEX member. With TTM revenues of $639 million and a market cap of $20.7 billion, ITWO carries a valuation multiple of 32.4x. And like BVSN, i2 is profitable.

Still, ITWO's monthly gain is a much more modest 43.5 percent. Given its higher revenues and better fundamentals, why hasn't ITWO surged as much as Ariba and BroadVision in recent weeks? The answer is that i2 never fell as far as the other two in the first place. For the year, ITWO is up 29 percent - better than nearly any other e-commerce software company - while ARBA and BVSN are up 8.8 percent and 8.1 percent, respectively.

Expect this process of sorting winners from losers to continue through the summer and to accelerate in the fall when money that is now on the sidelines re-enters the market.