Ariba slide underscores market jitters

Theories about companies prefering to work with small group of suppliers rather than large exchanges has been floated in a recent report. However, the recent downturn of Ariba's stock may have more to do with market nervousness than other reasons.

Wit Soundview is besting Bear Stearns in an analyst tug-of-war right now, but that says more about market than the research reports themselves.

Shares of Ariba fell this morning after Wit Soundview analyst David Mahoney downgraded the stock to a "hold" from a "buy" rating. Mahoney also cut down the other half of the B2B Big Two, Commerce One, but that stock rose initially because the company announced a deal in Korea. Ultimately it didn't help - Commerce One joined ARBA in negative territory by the afternoon.

And there's your market in microcosm.

The prospect of an end to the election shenanigans and George W. Bush in the Oval Office briefly excited Wall Street today. However, the market didn't take long to return most of its gains; as I type this, the Nasdaq Composite Index is now down seven for the session, after opening 75 points higher than Friday's close.

Maybe the refusal to stay positive was fueled by Al Gore's continuing court challenge, but who on Wall Street really takes that seriously at this point? Fact is, the underlying market sentiment remains depressing, regardless of the presidential outcome. Shareholders simply aren't confident, and they're looking for any excuse to sell.

Thus, Wit Soundview's downgrade drives people out of Ariba, even though the analyst said nothing new.

Mahoney basically says running a B2B marketplace will not be as profitable as the pioneers envisioned. He cites the conclusions of a Gartner Group e-business conference earlier this year: "Hub-and-Spoke marketplaces will be used only for low-value transactions ... Vertical marketplaces will become non-profit cooperatives supported by industry participants... The value marketplaces currently add will quickly become commoditized."

The Wit Soundview analyst now believes the real money is in supply chain planning, because manufacturers don't buy core goods from just anyone; when it comes to the most important parts, a company works closely with a small group of suppliers who have intimate knowledge of the buyer's business data. Unfortunately for Ariba and Commerce One, supply chain management is the province of ERP vendors like SAP, Oracle and Manugistics.

Bottom line for Mahoney: Ariba and Commerce are overvalued.

This is not an original thesis. Mahoney is not the first person to articulate it, and today's report isn't even the first time Mahoney himself has floated the idea. "Both stocks have (already) come down sharply since we published our observations from Gartner's B2B Marketplace conference," Mahoney writes.

In fact, Bears Stearns analyst Kaushik Shridharani in his research note says the same thing: nothing has changed for the B2B sector. "There have not been any announcements significant to business e-commerce to warrant such a sharp decline in valuation," Shridharani writes today.

Shridharani reiterated triple-digit price targets for Ariba, Commerce One and Clarus. The Bear Stearns researcher doesn't question the basic assumptions of the B2B proponents, but simply compares B2B stocks to other major software vendors. He points out that based on expected revenue growth, the B2B marketplace folks trade at far lower multiples than big technology names such as Microsoft and Oracle.

Despite that valuation gap and despite the lack of any empirical evidence to indicate Ariba the company is going to tank anytime soon, investors are sending ARBA the stock lower on the opinion of one analyst working for an investment bank that, while certainly well-known in the technology industry, wouldn't qualify for the top tier of Big Names.

That tells you all you need to know about the market's nervousness. It needs a big reason to turn around. Nothing has appeared yet.

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