The second Internet stock wave is under way, and it will be a tsunami
compared to the first wave experienced in late ’98, early ’99.
The first
wave was driven largely by investors gobbling up consumer oriented issues
(business-to-consumer, B2B). Stocks fueling the first wave included Yahoo! Inc.
(YHOO), Priceline.com Inc. (PCLN) and Amazon.com Inc. (AMZN) among many others.
There
were a lot of attracting forces to B2B stocks, but no bigger force than the
simple fact that as consumers, we understood these stocks. Whether it’s
Yahoo! trying to be our start page, Priceline trying to get us to “name our
price” for groceries, or Amazon.com hawking the latest Tom Clancy novel,
these B2C companies impact our daily lives.
Now comes the second wave, currently in its infancy, but gaining momentum.
Investment banks, analysts, and investors alike took a while to recognize
this emerging business-to-business (B2B) opportunity, but it’s quickly
becoming the buzz on Wall Street, as investment banks now race for deals,
analysts begin coverage, and investors brace themselves for a potentially
wild ride. It was only 3-1/2 months ago when B2B market leaders, Safeguard
Scientifics (SFE), Internet Capital Group (ICGE), and VerticalNet (VERT),
were trading at $50, $45, and $30, respectively. So, why is it only now that
the immense B2B opportunity is getting its due recognition? One big reason
is the sector’s lack of consumer appeal.
Consumers lack exposure to the world of businesses selling goods and
services to one another, such things as nuts, bolts, chips, and procurement
services. The markets and processes also tend to be intimidating, confusing,
and for a lack of a better word, uninteresting! This notion is one that some
B2B executives actually pride themselves on: “Ours is the least sexy site on
the Internet and we are damn proud of it,” says Mark Walsh, CEO of
VerticalNet, a provider of online, B2B, vertical communities.
Don’t fall asleep just yet, though, this B2B wave has the potential to
out-due its B2C counterpart by leaps and bounds while providing Internet
stock investors with new and greener portfolios. Even though the stocks
have enjoyed a recent run up, there is still significant investment
potential within the B2B sector.
So what exactly separates this sector from its B2C counterpart? 1) The
prodigious market opportunities for many B2B companies and 2) the highly
defensible business models many B2B companies posses because of inherent B2B
strengths.
Prodigious Market Opportunities
The $43 billion in online U.S. B2B revenues done last year was well under 1 percent
of the value of all B2B commerce done during the year, but still accounted
for 84% of total e-commerce revenue. Forrester Research estimates that U.S.
business-to-business e-commerce revenues will grow to $1.3 trillion by 2003.
B2C revenues will reach only $108 billion by 2003 according to Forrester.
Market values have certainly surged ahead of earnings, however, but that is
true for all Internet stocks. Perhaps Internet investors can truly justify
entering this space though, with such lucrative market opportunities for
companies and relative stability within the sector. After all, we’re not
talking books and toys here!
B2B Strengths
Verticality- In the B2C world of books, clothes and toys, almost anyone can
set up shop and capture some market share. Take for instance Lyle Bowlins’
online bookstore, Positively-You.com, based in Cedar Falls, Iowa. The site
grew out of Bowlin’s spare bedroom and now does well over $2,000 in
revenues each day. The B2B e-commerce sector is a highly fragmented space,
with enormous opportunities for companies able to better bring buyers and
sellers together, however, the opportunities lie in narrowly focused,
vertical industries such as plastics processing, steel, and procurement
services. Experience and Industry relationships are therefore crucial for
success, and are the very factors, which create high barriers to entry.
The Eyeball Factor- B2B “hubs” aren’t interested in spending hundreds of
millions of dollars in order to aggregate millions of eyeballs at their
respective sites. B2C companies such as Amazon.com have to take this
approach, hoping that the volume of purchases will make for the slim margins
made on each transaction. B2B companies don’t worry because their customers
tend to have “deeper” pockets. VerticalNet’s “Power Online” hub, auctioned
off three $38 million dollar power plants this past summer.
Network Effects- The idea here is that buyers and sellers try to find each
other, so the more buyers a B2B hub can attract, the more sellers will enter
its network, and vice versa. Networking effects are especially critical at
such early stages in Internet and B2B e-commerce development. Companies able
to attract both high-profile customers and large amounts of buyers and
sellers to its network will be rewarded with rapidly rising revenues and
higher barriers to entry.
So the business-to-business wave promises to be much more powerful and
lucrative than the first B2C wave. In addition, fewer surfers (companies)
will have what it takes to ride the wave, leaving B2B leaders with enormous
market opportunities. Internet investors are smiling from the shoreline.
Check back with me on Thursday, as I’ll unveil an investment approach,
focusing on three leaders within the B2B sector. I call it the “B2B Ladder.”
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