VerticalNet Is Rising Through Sheer Chutzpah

The company maintains nearly 50 Internet communities for several industries, giving it a decent shot at a big market share in the B2B market.
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SAN FRANCISCO -- Like other companies fighting for a piece of the business-to-business e-commerce market,

VerticalNet

(VERT)

is building a site to let companies reach customers, distributors and suppliers on the Net. Unlike most others, VerticalNet is getting ahead through sheer chutzpah.

VerticalNet doesn't focus on one industry as

GoFish

does on the seafood industry,

Chemdex

(CMDX)

on biotechnology and

Comps.com

(CDOT)

on commercial real estate. Instead, it maintains nearly 50 Internet communities for industries ranging from fiber optics to food service, from machine tools to medical design.

That broad base gives VerticalNet a decent shot at a big market share in the B2B market. VerticalNet is "swimming in a bigger ocean," says Charlie Finnie, an analyst at

Volpe Brown Whelan

. "It's always better to be addressing a big market." Volpe, which rates the stock a buy, helped underwrite VerticalNet's IPO.

Analysts say the B2B side of e-commerce will soon dwarf the e-commerce market for consumers. Business transactions between companies on the Net will reach $1.3 trillion by 2003, or nearly 10 times the projected figure for online transactions between consumers and businesses, according to

Forrester Research

.

"In the B2B space, people see huge revenue expansion and sequential growth," says Ross Moscatelli, a fund analyst at

Denver Investment Advisors

, which holds shares of VerticalNet.

VerticalNet is pushing ahead for its piece of that rich pie. Its alliance with

PaperExchange

, announced on Monday, suggests that rather than competing against smaller B2B sites, the company will be working with industry-focused B2B sites, as consumer portals such as

Yahoo!

(YHOO)

have partnered with more focused Web sites. VerticalNet and PaperExchange will jointly brand and market a site where companies can buy and sell paper-making equipment.

VerticalNet is also getting respect from bigger players. In a deal that is likely to be announced in November with

Microsoft

(MSFT) - Get Report

, VerticalNet will have better access to businesses that use Microsoft software, according to a source at VerticalNet. That could open up big markets for VerticalNet.

And this week, VerticalNet is planning on relaunching its storefronts, the personalized sites that VerticalNet hosts where vendors can hawk their wares on the Web. In addition to the current features that VerticalNet offers on its industry communities -- chat, news, product reviews, resumes, and auctions -- the new storefronts will offer the ability to buy and sell products online.

The storefronts will bring VerticalNet revenue in two ways. Companies will pay $15,000 for one of the new, souped-up storefronts (roughly double the current cost). Eventually, once transactions are being made through VerticalNet, the company will take a fee of all transactions -- ranging between 2% and 10%, depending on the size and nature of the transaction, says Blair LaCorte, company senior vice president of strategy and e-commerce.

The company expects only 5% of its 1999 revenue to come from e-commerce fees, with the rest coming from setting up and maintaining storefronts and from sponsorships. In 2000, the company expects 15% to 20% of revenue to come from commerce, says company CFO Gene Godick. Eventually, he says, VerticalNet hopes to generate 55% of its revenue from e-commerce and the rest from advertising, such as sponsorships.

E-commerce "is where the bulk of revenue and earnings will have to come from," says Joseph Garner, director of research at

Emerald Research

. "It's their brass ring." Garner, whose firm has no underwriting relationship with VerticalNet, rates the stock speculative buy. Emerald's parent company, Emerald Asset Management, holds shares of VerticalNet.

VerticalNet's stock has tumbled 17% in the past week, outpacing the 8% decline in the

Nasdaq Composite Index

, partly as a result of a broader market decline and partly because VerticalNet had nearly doubled in the previous two weeks. But those who believe in the stock are looking for more gains. "There's an expectation of a good quarter, having rolled out some e-commerce," says Bob Fontana, an analyst at

Wachovia Securities

, who rates the stock a long-term buy and whose firm hasn't done any underwriting for the company.

E-commerce should make up 7% of VerticalNet's revenue in the third quarter, up from 5% in the second quarter when the company brought in $3.6 million in revenue, says Fontana.

Robertson Stephens

analyst Eric Upin expects that ratio to rise as high as 20% by the end of next year. Upin has a buy rating on the stock. Robertson Stephens has no underwriting relationship with VerticalNet.

That kind of growth should give VerticalNet a formidable presence in the growing B2B space. "The game here is what kind of bait do you put out to capture as much of that as possible?" Upin says. For VerticalNet, putting bait everywhere at once seems to be working.