The B2B sector of the Internet market looks overheated. But there may still be plenty of upside in G2B.

Government to business, that is. That's the argument of supporters of

National Information Consortium

(EGOV) - Get Report

, a Kansas-based company that develops Web sites for state governments.

Located far from coastal Silicon circuits, saddled with a colorless name and lacking directly comparable rivals, NIC is an overlooked gem, say its fans. The stock makes a low-risk way, they say, to play a potentially huge market within the Internet revolution -- helping governments to go online, as the private sector does, to cut costs and improve efficiencies. NIC, they say, has a strong track record and compelling growth prospects. Plus, it appears a lot cheaper than better-known companies in the business-to-business e-commerce sector.

"You've seen a lot of moonshots in the B2B space," says James Pettit, the analyst covering NIC for lead underwriter

Hambrecht & Quist

. But, he continues, "This one has kind of gone unnoticed."

States' Rights

Well, sort of. After going public last July at 12, the company's stock traded as high as 44 1/8 in December; it closed at 31 Friday, up 2 3/8, after

Bank of America

(BAC) - Get Report

, the nation's largest bank, said it was partnering with an NIC subsidiary to develop an online procurement system for state and local governments. But NIC's 158% gain from its offering price looks oddly sluggish in light of other B2B stocks' performance.

VerticalNet

(VERT)

, for example, is up nearly 1,650% from its IPO last year.

Although it's in roughly the same line of work as a B2B hottie like

Scient

(SCNT)

, government-focused NIC works a little differently. For starters, its typical practice in building networks for states is to build the Web site for free. Instead of collecting money upfront, it takes a cut from transactions on the sites once they're up and running.

Of course, the sites that NIC develops don't tend to generate the sexiest deals in the world. The majority of NIC's revenue comes from selling driver's license records online -- information used primarily by companies in the car insurance business. The company also offers services like professional license renewal, as well as general, free information about the state targeted at businesses and citizens.

Growth has been brisk, and company followers are optimistic about the future. Over the first nine months of 1999, revenue jumped some 53% from comparable figures a year earlier, to $40.5 million.

Growth Hormone

In coming years, growth will likely come from several places, according to the NIC camp. For instance, it can offer more services in each state and expand into more states; it's in 11 now, and 15 are in or about to enter a request-for-proposal process in which NIC is competing, says Chief Financial Officer Kevin Childress.

Pettit and others expect NIC's sales to increase about 70% from 1999 to 2000, but that figure looks conservative. Childress says that one of the states in the RFP pipeline would be the first large state with which NIC has won a contract -- a boost, he says, of $40 million to $75 million in revenue. NIC hasn't lost a state competition yet, according to Childress. Pettit's current estimates, he says, don't assume a large-state win, adding that one would change all that.

"I think they can grow this revenue 50%-plus over the next five to 10 years," says Russell Anmuth, principal of the investment partnership

Gotham Holdings

, an NIC shareholder.

On the Cheap

NIC looks cheap compared with some other B2B plays, but valuing it is tricky. Scient -- against which NIC hasn't competed, but which Childress says could possibly go after its business -- is trading at more than 40 times estimated revenue for its fiscal year ending in March. B2B rocket

Commerce One

(CMRC)

is trading at 180 times calendar 2000 revenue estimates. NIC, by contrast, is trading at 16 times 2000 revenue targets. And unlike the other two, it showed positive cash flow from operations in its latest quarter. (Childress says it takes the company only three to four months to hit cash-flow breakeven in a state.)

Alternatively, one could value NIC against the companies with which it already competes, like

IBM

(IBM) - Get Report

and

Electronic Data Systems

(EDS)

, though these companies' massive size and slower growth stretch the comparison. EDS, which has gone up against NIC for business (and lost), is trading about 1.5 times estimated cash flow. Clearly, finding comparable companies looks tough, which may have stigmatized NIC among investors.

Talk About the Government

While NIC may have built barriers to entry with the software and experience it has developed over the years, Anmuth acknowledges that a larger, deep-pocketed company could do the same thing that NIC does -- win a contract by giving away the store upfront and make a big investment on developing competitive software. But given the time and effort it would take to catch up with NIC, he thinks the company could be a takeover play.

Well, if it's so great, why aren't investors busting down the door to invest? "It seems to us the word 'government' scares a lot of people," Childress says. "I think there's a perception that governments are cumbersome and slow-moving."

Uh, yes. We at

TheStreet.com

have heard that rumor, too. But let's go out on a limb and assume that governments do move slowly. That hasn't stopped NIC yet.