Growth Expected for E-Commerce ‘Enablers’
Investors eyeballing Internet retailers have become more picky about the merchandise this summer. But many of the companies that help build the stores are moving stock at a brisk pace.
The bloom has come off the rose for so-called e-tailers since Internet stocks began their slide from the heights of April. Notwithstanding the recent rebound in most Net stocks--sparked by easing bond yields, Merrill Lynch analyst Henry Blodget’s reminder that Christmas is approaching, and plain old bargain hunting--the e-tail story has changed for the worse in many investors’ minds.
The Net infrastructure story, however, is attracting increasing attention: The idea is that the way e-commerce is evolving might play into the hands of the companies that enable, rather than transact, the virtual sale.
“These are the companies that make e-commerce happen, that make it reliable and secure,” said analyst Ulric Weil at Friedman, Billings, Ramsey & Co. “For it to work, you need a deep infrastructure that the consumer is barely aware of.”
A key to the infrastructure stocks’ appeal, he notes, is that “they’re not exposed to the risks of any particular market falling apart.”
Some stocks in this wide-ranging area are veterans of Internet mania. One example is Inktomi. The developer of search and traffic-management technology is a core holding in many Net-heavy portfolios.
But more stocks in the group are beginning to build their profiles, led by such new phenomena as Juniper Networks and Redback Networks. Both make ingenious hardware that accelerates the construction of a bigger, better Web.
Juniper’s shares have surged 40% since Aug. 9, the date the Interactive Week Net stock index bottomed after July’s dive.
By contrast, shares of such e-tailers as Onsale and Ticketmaster Online-CitySearch have been weak performers in the Net stock rebound.
There has been more than simple profit taking at work. Investors are learning that creating a successful merchant business on the Internet is costly and the barriers to competition are low.
No one is saying that the pace of transactions will turn sluggish--look at Dell Computer’s report that 40% of its sales take place over the Net. But for most e-tailers, the promise of eventual profitability can’t be taken for granted.
Amazon.com, the e-tail bellwether, is the poster child for this trend, just as it symbolized the e-commerce boom. In reporting its second-quarter results, Amazon led investors to expect expanding losses, reporting 6% revenue growth over the previous quarter as marketing costs jumped 41%.
The company has held fast to its strategy of investing to claim new e-commerce territory rather than put black ink on its bottom line. Its growth plan involves owning warehouses and undertaking other non-virtual initiatives with bricks-and-mortar overhead.
That has scared off some investors and jolted assumptions about doing business on the Web.
Simply put, “investors have become less happy with e-tailers that are getting less virtual,” said Paul Cook, lead manager of the Munder NetNet stock fund, who applauds Amazon’s moves.
It used to be that the virtual business model was considered best for an e-tailer. Now there’s concern that to be very successful, an e-tailer may have to spend loads of dollars to meet customers’ needs.
At the same time, some e-tailing niches are getting crowded as sites that book travel or sell music, pets and financial services multiply.
“The market for pure e-commerce is more mature than it was a year ago,” said Brad Gurlinghouse, a partner with @Ventures, the venture-capital arm of CMGI Inc.
The biggest challenge may be fending off the invasion of the household names as real-world giants with established brands, big customer bases and solid fulfillment operations target e-commerce.
How has the story changed? As Jim Jubak cleverly put it in a column at the Microsoft MoneyCentral Web site, a year ago the question was, “Is Amazon the next Wal-Mart?” Now it’s “Is Wal-Mart the next Amazon?”
Whether they Web-ify haltingly or quickly, the traditional retailers flag trouble for e-tailers. But they’re a high-powered clientele for firms that host sites, personalize user interfaces or provide online billing or other e-commerce services.
“At this point, rather than compete to sell books or toys, I would rather facilitate the purchase of books or toys for other people,” Gurlinghouse said.
Some analysts say the Web infrastructure stocks could continue to lead the Net sector’s rebound as more investors warm to the group. And anticipation of a knockout holiday shopping season online could boost these stocks as much or more than the e-tailers themselves.
As usual with the Internet sector, investors shouldn’t make profitability a primary criterion in selecting the stocks. As with other Net issues, infrastructure stocks tend to be valued on their demonstration of leadership and pace of sales growth.
As befits their role providing the plumbing behind the screens, some strong contenders in this emerging field are still far from the forefront of tech investors’ minds. A sampling:
* Portal Software develops billing technology for Web businesses. Its second-quarter results, reported last week, paint a robust picture as revenue of $20.8 million almost quintupled from a year ago.
The company went public in May at $14 a share and the stock reached a high of $59.94 before pulling back in July.
* Concur Technologies develops systems to automate in-house transactions on corporate networks and the Web. That means employees can catch up on personnel matters or expense reporting in a self-service mode.
Concur also facilitates exchanges between a company and its partners and vendors, competing with CommerceOne and Wall Street favorite Ariba.
Concur’s role “in the middle of the transaction,” says NetNet’s Cook, is the key to its opportunities. Revenue doubled to $11.2 million last quarter.
But the stock has stagnated after taking a dive in the spring and again in July. It hasn’t participated in the recent Net rebound.
* Self-service is an area well-suited to the Web. SilkNet Software provides customer support tools that minimize the need for human reps.
The firm’s multimedia-rich software uses video, sound and graphics to illustrate solutions to customer gripes at merchant sites. CMGI, the premier incubator of e-commerce enablers, groomed SilkNet, which tripled its revenue last quarter to a still-flyweight $4.76 million.
* Security First Technologies enables banks to offer services online. Intuit has taken a stake in the firm, and the two are collaborating on software for their financial services clients. The company’s sales jumped 245% last quarter to $15.7 million.
Security First has a place in the Monument Internet fund, along with Inktomi, RealNetworks, InfoSpace and many other e-commerce infrastructure stocks, reports fund manager Alex Cheung. Pure e-tailers, contrast, account for just 10% of the portfolio.
Cheung feels that devotees of the pure e-tail theme have their timing backward. E-commerce is in its build-out phase, he reasons, and the era of virtual mass merchandising, although inevitable, is still ahead of us.
“In the next few years, lots of money will pour into Internet infrastructure and services,” he said.
“Once the infrastructure is developed and more companies are on the Web, the relative importance of e-commerce will rise dramatically and the enabling companies will take a back seat. Our investment focus will shift then.”
Times staff writer Edward Silver can be reached at edward.silver@latimes.com.
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Net Infrastructure Plays
Shares of many companies that are building the Internet’s infrastructure and making e-commerce possible have been leading the recent rebound in Net shares. Some of the players and their stock action since the broad Interactive Week Net stock index bottomed on Aug. 9:
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52- 52- Ticker week* week* Monday Monday % chng. Stock symbol High Low Close Change from 8/9 CommerceOne CMRC $74.13 $26.50 $54.50 +$5.50 +66% Redback Networks RBAK 114.00 32.50 126.50 +21.75 +49 Ariba ARBA 138.06 61.00 126.63 +15.25 +47 Juniper Networks JNPR 223.88 90.13 227.00 +22.38 +40 SilkNet Software SILK 52.38 15.63 33.75 -0.63 +32 Security First Tech SONE 79.25 4.63 37.50 +2.00 +32 RealNetworks RNWK 131.88 7.63 87.81 +6.94 +30 Inktomi INKT 159.13 19.50 115.88 +2.38 +25 Portal Software PRSF 59.94 27.75 48.50 +3.25 +22 InfoSpace INSP 72.63 9.75 45.06 +1.50 +6 Concur Tech CNQR 59.25 14.00 23.06 -0.25 -20 Interactive Week 369.07 89.61 295.99 +9.04 +17 Net index S&P; 500 index 1,419.00 957.00 1,360.22 +23.61 +5
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* Figures don’t include Monday’s trading.
Sources: Bloomberg News, Times research
