Just weeks after investors poked their tongues into the dot-com light socket, they're picking themselves off the floor to do it all over again. You'd think they'd have learned their lesson.
Market meltdowns usually provoke a moment of hard-nosed reassessment. But what's to learn from the NASDAQ's blowout? A pet store's profits will not exceed the GDP of Belgium—not now, not 10 years from now. Day traders should save their financial theories for the nurses at the nut hut where they'll be staying.
Understanding this spring's tech-stock slide doesn't require deep thoughts. But rather than acting on the obvious, the Internet's true believers are just moving the party around. Now that e-tail stocks bark, B2B Web stocks are all the rage.
At Christmas investors just loved what a dot-com anything did for their portfolios. Today they want a piece of the action in sludge incinerators, corrugated boxes, cattle carcass saws, and toxic waste disposal. Who says the glamour's gone out of tech stocks?
Trouble is, the floor is dropping away from B2B stocks just as they become fashionable. FreeMarkets, which sets up online auctions for old-economy supplies, saw its price rocket to $370 a share this year. Now it trades at around $62. Internet Capital Group, the sector's star holding company, has fallen from $212 to $36 in four months. Ventro, another online market maker, tumbled from $244 to about $27 in May. And Merrill Lynch's Internet Holder's Trust—a fund that tracks B2B companies—slipped by more than 68 percent between mid-March and mid-May.
The B2B shakeout isn't coming. It's here.
What caused this giddy nonsense in the first place? One of the most widely quoted statistics on B2B prospects came from the GartnerGroup—which estimates that a staggering $7.3 trillion worth of global B2B e-commerce spending will truck through the Internet in 2004, up from $145 billion last year. But few investors noticed the more significant figure in that report: Nearly two-thirds of that money will go directly from manufacturers to suppliers, not to Internet middlemen.
Even so, the remaining $2.7 trillion is a hot little industry. As you might expect, everyone wants a piece of it. Sites that sell homemade jellies, sports equipment, antiques, and pajamas are suddenly rolling out B2B plays. They're following on the heels of eBay, Yahoo, Priceline, and other well-entrenched players. The term has lost not only its cachet but its very meaning.
B2B sites face the same problem that cripples e-tailers: low barriers to entry. Even if you've got the best site going for transporting steel girders to construction companies, it's just a matter of time before Amazon.com moves in on your game. Investors who try to pick winners from this circus are betting too early and too high.
Worse, groaning brick-and-mortar giants don't need startups to streamline their purchases. Ford, Boeing, and General Electric have every incentive to set up their own Internet shops. So do hundreds of other companies— entire industries, in fact.
There's no question that B2B will be big. But as with Internet consumer sites, the smart money for investors rides on the plumbers: companies that supply infrastructure for the Net. Oracle, Siebel, and Kana are already making a pile of money in software. So are Ariba and Commerce One. IBM, Sun, PMC-Sierra, and Exodus build round-the-clock reliability into their Net hardware and supply custom services for businesses setting up shop on the Web. And firms that build the network backbone are indispensable. Cisco, Lucent, and JDS Uniphase are good bets.
B2B auction sites and clearinghouses come and go. But these companies will make money from the winners—and from the losers.
