Don't Write Off B2B as a Craze

Seymour challenges 'dour' warnings about jumping on the B2B bandwagon.
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A couple of weeks ago I said I had bones to pick with fellow

TheStreet.com

columnists

Herb Greenberg

and

Adam Lashinsky

. The

columns about Herb's unease with

Intel's

(INTC) - Get Report

reporting of gains from its substantial venture-investments portfolio ran here on March 8. But this wild market, and a bout of lower-back pain from an extruded disk kept me from getting to my friendly argument with Adam.

Today, it's his turn in the dock.

I really like Adam's work. I'd classify him as a "prudent bull," a phrase I often use to describe my own perspective on investing in technology stocks. But sometimes, for all of us, the prudence: bullish ratio gets a little out of whack, and we descend into an excessively dour mood, or become unwitting cheerleaders, over a company or an industry.

God knows, better the former than the latter. But best of all, a balance between the two.

You've read a lot here lately on one of Adam's recurring themes: the fragile future of B2B stocks. He's repeatedly referred to the boom in B2B as a "

craze" and a "

mania."

I agree ... to a point. Some awfully fringy stocks have slapped a B2B sign on their doors, then enjoyed unjustified run-ups to unsustainable price levels. Check the action in the B2B market over the past month and you'll find plenty of examples of that volatility.

Heck, this is a market where even the strongest B2B stocks suffer from a lot of volatility.

But just because investors bid some of these stocks up to the rafters doesn't mean B2Bs, or at least some corners of B2B, don't have rich and powerful futures. And I'm a little worried that

TSC

members may get infected with an "All B2B stocks are losers" disease.

For myself, I think that B2B is the most powerful restructuring of commerce underway, and that the effects are going to be profound. Those who ride the big winners in B2B are going to enjoy incredible returns. Indeed, many

TSC

members already have made a bundle in B2B, to judge from their emails to me.

When I first alerted

TSC

members to the coming B2B boom here more than a year ago, things were just getting started. (If you missed that

column, or have come on board as a

TSC

member since then, I'd recommend you go back and read it in the

TSC

archives.)

VerticalNet

(VERT)

, for example, had just gone public at 16. It closed this past Tuesday at 197 -- and there was a 2:1 split last fall, too.

But it's far from too late to play this game. It's not a craze, and it's not a mania. Forget the Tulip Mania stuff; this is very real.

We've already seen big successes -- and I think we'll see continuing successes -- in B2B stocks of several kinds. The boom in CRM, or customer relationship management software, is one example. Stocks such as

Kana Communications

(KANA)

, which helps companies more effectively and more economically deal with customers, are good examples of these likely continuing successes.

But I see the purest form of B2B, and the biggest winners, in the market makers who set up auctions -- we really should call them "reverse auctions" -- which bring industrial buyers and sellers together. This is an immense opportunity, and I think the B2B marketmakers are going to continue to flourish.

I tend to prefer those companies that are assembling vertical markets, because their relentless

focus, focus, focus

on markets they come to know well pays off sooner. But the horizontal marketmakers who bring reverse auctions to a variety of client companies and industries are going to succeed, too.

The Big Three reasons I think B2B stocks are going to be a huge and continuing success, far outpacing the growth of B2C (business-to-consumer) companies' share prices in the near to mid-term future:

    This is a structural change. This is by far the most important reason, in my book, and is as yet little-noticed. If you and I buy some books from Amazon.com (AMZN) - Get Report and Barnesandnoble.com (BNBN) , pick up a laser-printer cartridge from Egghead.com (EGGS) and go to Bluefly.com (BFLY) for a couple of nice polo shirts, that's cool. And yes, some of us are buying more and more online. But we also keep dropping into Barnes and Noble (BKS) - Get Report stores for other books, hit the nearest Gap (GPS) - Get Report for cool shirts and drop into Best Buy (BBY) - Get Report for DVD players. Because our adoption of B2C buying hasn't been a structural or behavioral change. At least not yet. And that's unlikely to happen for some time to come. We buy so many things, so many ways, that we're far from adopting a pure B2C habit. Yet when an automaker starts buying its parts in ongoing B2B reverse auctions, or an insurance company starts getting office supplies via its B2B channel, or a plastics company starts buying feedstocks via B2B auctions, that's a structural -- read permanent -- change. They're not going to do a few deals this way, a few deals that way, a few more via some other channel. Purchasing managers want to simplify, simplify, simplify their sourcing operations. Companies want to cut to the bone the prices they pay their suppliers. B2B is the way to do that -- we're beyond the point when there's any argument about that -- and the continuing, sustainable return from using B2B channels is something they just can't, and won't, walk away from. You can't go home again (sorry, Mr. Wolfe) once you've committed to B2B buying of automobile gas tanks, business forms and polyethylene. You'd leave too much money on the table. Materiality is a big issue. Sure, overall consumer spending is huge. But the amount of most individual consumer transactions is very small. Yet in B2B industrial deals, companies spend millions per buy -- and keep discovering they're saving millions per buy. This stuff counts, big-time. B2B facilitates short cycle times. B2B buying is a perfect fit with the just-in-time (JIT) approach of most large companies today. It was in many ways the missing link, or at least the last link, in implementing end-to-end, computer-controlled, minimum-cycle-time/minimum-inventory production systems.

I don't think Adam is

wrong

to be wary of jumping on the B2B bandwagon. Far from it: A healthy skepticism is always a good thing in evaluating investments.

But at least on B2B, he doth protest too much, methinks.

Which doesn't mean I think even the best B2B stocks get a bye into the finals. Tomorrow, my own worries -- notwithstanding everything I've said here -- about what could go wrong for B2B companies.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.