Quick, which business-to-business software stock doesn't belong --
All have been cast as the glam guys of B2B, the vanguard of a new generation of software companies that hope to capitalize on the rush toward B2B e-commerce. And all have gotten the snot knocked out of them lately: Ariba and Commerce One are at least 70% off their March highs, while i2 Technologies is 60% off its peak.
Yet some investors -- and a couple of fundamentals -- suggest that i2 doesn't deserve the same pummeling as its B2B brethren.
Marc H. Klee, co-manager of the $3 billion
John Hancock Technology fund, says i2, which was started in 1988, has a bit more heft than the two co-conspirators it is often identified with.
"I am in no way diminishing the accomplishments that Ariba and Commerce One have made, but I think i2 is somewhat of a different animal," Klee says. "When you're talking about i2 doing $1 billion in revenues
in 2001, you're talking about a profitable company vs. companies that simply have a lot of potential."
In its most recent quarter, i2 reported revenue of $186.3 million, a rise of 58% over the year-earlier period. By comparison, Ariba had revenue of $40 million, and Commerce One, $35 million. Growth rates for those companies, though, were significantly higher, with Ariba growing 322%, and Commerce One surging 1,564% from the year earlier period.
And at a time when the amount of cash a company has on hand has become a recurring question at investment conferences, i2 can boast $638.4 million in cash. Ariba holds $249.3 million and Commerce One has $97 million in reserve.
"Some stocks are deflating and they're never coming back," says Chris Bonavico, manager of the $500 million
Transamerica Premier Small Company fund, which counts i2 as its largest position. "I don't think I own those stocks. I own the ones that are going to be sustainable, stocks like i2."
Bonavico, who has been labeled a "True Believer" of i2 by Chicago-based fund tracker
, because he's had as much as 10% of his assets in the stock, says he likes i2's dominant position in the supply-chain software market. Using complex algorithms, that software tells companies the best way to buy, sell, order, ship and build things. In the quickly changing world of business, those are often maddening processes that can humble even the most effective managers. In short, doing what i2 does well isn't easy.
"The bull case really is that i2, it has a working software solution for supply-chain management, which is a very difficult thing to do," Bonavico says. "Everything you've heard about B2B really is focused on the supply chain, i.e. managing all of the inputs you need to do business." He says supply-chain management solutions from
don't come close to what i2 has to offer. Analysts peg its share of the supply-chain software market at 30% to 50%.
The flip side of that is that i2 is vulnerable to Oracle and SAP, which are developing broader, all-encompassing B2B software packages that may be more appealing to companies looking to do one-stop shopping.
And comparing i2 with Ariba and Commerce One too closely is sure to draw sneers from believers in the younger, faster-growing upstarts. After all, i2 was started by Chairman and Chief Executive Sanjiv S. Sidhu after he left his job at
in 1988, and has had more than a decade to think about the best ways to get things done. Commerce One grew into its present self in 1997 and Ariba got off the ground in 1996.
i2, though, has already been noticed by many investors on Wall Street. At 26 times trailing twelve month revenue, the stock is hardly cheap, unless, that is, you compare it with Ariba (86 times trailing revenue) and Commerce One (a 70 multiple). In fact, i2's valuation is more in line with Oracle, which trades at 20 times sales. In the midst of the recent market plunge, Oracle is off just 27% from its 52-week high set in March.
Bonavico, the true believer, concedes that i2's "biggest risk is the valuation." And just because it's cheaper than its young peers, doesn't mean it couldn't fall more. Indeed, valuation comparisons merely raise the question of whether i2 is more attractively priced, or whether Ariba and Commerce One have a lot further to fall.
And not everyone is hanging on to find out. According to Morningstar, $1.8 billion
Strong Common Stock fund recently sold 365,000 shares of the stock. The stock's high valuation was the reason for the move, though the fund still maintains a small position in the stock.
"We looked at the valuation, and it was just tough to justify on any fundamental basis," said Dave Carlsen, an analyst with the fund. "Given the correction in the marketplace, and B2B getting hyped so much in the fourth quarter, expectations got out of hand."
Strong wasn't the only one selling i2. Sidhu, the company's founder, has registered to sell 615,000 shares either directly or through his family's accounts, since the beginning of May. Those shares are in addition to 200,000 shares Sidhu sold in late April, according to security filings. i2 did not return a call for comment on the registration.
"It's always for the same reasons," says Michael R. Micciche, an analyst with
Donaldson, Lufkin & Jenrette Securities
, who rates the stock a buy and whose firm hasn't done underwriting for i2. "They'll say it's to diversify or they're buying a home or putting the kids through school. Most of these guys own so many shares that they do have to sell them in some systematic way. But it's never something you like to see. Am I alarmed? No. But you'd rather see the insiders hang on."
As of Jan. 31, Sidhu owned more than 62 million shares of i2, or 39% of the company. That means the shares he recently registered to sell account for less than 1% of his holdings.
With the prickly atmosphere surrounding technology stocks, is there still downside risk in i2? Sure there is. In the
head-fake rally and subsequent plummet on Thursday, i2 gave up 5 3/16, or 5%, to finish at 90 1/8. But many analysts and investors have price targets on the stock in the 140-150 range.
"I think there's downside potential in any stock," says Hancock's Klee. "But I think you could make a reasonable case of this stock going up in the mid hundreds, and your downside risk is probably still 25 points. So if I see 50 points of upside potential, and 25 points on the downside, I think the risk reward is worth it."
Especially if i2 is one of the few B2Bs left standing, when the smoke over technology clears.
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