Target Practice in the B2B Market

One analyst sets a whopping 1,000 price target on Commerce One. Our columnist breaks down the math.
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A prominent analyst just announced a 12-month price target for Berkshire Hathaway (BRK.A) - Get Report: 500,000 per share.

That's just a joke -- who'd really believe that technophobic

Warren Buffett's

investment vehicle would grow 10-fold in a year? But it did make you stop and look, right?

Gone are the days when Wall Street analysts did fundamental analysis on a stock, assessed the company's growth prospects and assigned a realistic price target. To be noticed today, big is in. And just a wee bit big -- like Henry Blodget's now-quaint 400 price target on

(AMZN) - Get Report

in late 1998 -- isn't good enough. Now it takes more digits, like the 1,000 target that David Garrity of

Dresdner Kleinwort Benson

in New York placed Monday on

Commerce One



Garrity's forecast is the biggest yet on the highflying maker of software for connecting industrial buyers and suppliers online. And it's completely possible he'll be right. Not only can well-received guesstimates become self-fulfilling prophecies, his read on the B2B e-commerce zeitgeist may well be dead-on accurate. But his rosy projection is part and parcel of our giddy times, and it's not limited to securities analysts.

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The stodgy

Boston Consulting Group

upped the ante Tuesday on all business-to-business e-commerce with the

projection that the segment will ring up $2 trillion in revenue by 2003. Understand the publicity-value context of the BCG report. For months, the financial world has been repeating the mantra first propagated by

Forrester Research

that B2B revenue would hit $1.3 trillion by 2003. Indeed, the $1.3 trillion mark figures into analyst Garrity's forecast for Commerce One.

Then this fall,

Goldman Sachs

pronounced the B2B phenomenon a $1.5 trillion opportunity. Anything not comfortably higher than these two levels would have provoked a big yawn from Wall Street and the media. So for good measure, BCG threw in an additional $800 million or so from old-fashioned electronic data interchange -- a proprietary communications method from the pre-Net days -- to get a $2.8 trillion market.

Et tu

, Forrester?

Getting back to Dresdner Kleinwort Benson's Garrity, the interesting thing is that he's not a "technology" analyst. He actually covers automobiles for the German-owned British investment bank, which has done no investment banking for Commerce One. And he came to his lofty opinion of Commerce One because of the deal

General Motors

(GM) - Get Report

has struck with Commerce One to build a joint procurement site for all of GM's suppliers and customers. Indeed, Garrity reckons that GM's potential 20% ownership stake in Commerce One -- through its 4.8 million warrants to buy Commerce One stock down the road -- is reason enough to own GM.

As of the market's close Tuesday, Commerce One -- with recorded 12-month trailing revenue of $18 million -- is worth $11.6 billion. Were its stock to hit 1,000, it would be worth $24 billion. GM -- with trailing 12-month sales of $176.6 billion -- is worth $45 billion.

Anyway, Garrity has a methodology for his 1,000 price target. In fact, he has three, and his math actually gets him considerably more than $1,000 a share.

One posits that Commerce One snags 10% of the whole B2B market, a figure he discounts back

10 years

to get a valuation of $1,843 per share. The second applies a future price-to-sales ratio equal to that of

America Online


. Discounted back, this estimate yields a price of $1,975 a share. A third, more conventional approach, takes a stab at Commerce One's future cash flow and gets a present value of $1,936.

Now here's the fun part, acknowledging that there are risks to assuming Commerce One becomes the GM of B2B e-commerce, Garrity slashes these guesses in half to arrive at his 1,000 target. Now there's some precision in analysis.

But who's to say he's wrong? Shares in Commerce One jumped 17 3/4, or 4%, Monday and another 57, or 13%, to 480 Tuesday. They're nearly halfway to Garrity's target. Of course, volume remains around a million shares a day, undoubtedly because Commerce One's float remains only about a tenth of its 24 million shares outstanding, meaning only a fraction of the value of the company can be traded each day.

Garrity gamely compares the B2B land rush to the early days of the railroad industry, when speculation was rampant and fortunes were made and lost repeatedly. "We highly recommend that investors jump aboard this train," he advises.

After visiting Commerce One's overflowing headquarters Tuesday and interviewing the company's mild-mannered but driven CEO, Mark Hoffman, it's believable that Commerce One is a world-beater (more on that to come in a future column). But will it be worth half of its partner General Motors in the space of a year? That's thinking big indeed.

Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

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