January 7, 2000 11:55 AM PST
Taking stock of 1999
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Linux IPOs will be a tough act to followDecember 10, 1999
How high can business-to-business stocks climb?December 7, 1999
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We're not only talking about the mascot of the open-source operating system called Linux, but also of the penguin-like way that gaggles of investors jumped headfirst into "the next big trend." The results were huge swings in the price of individual stocks and astounding across-the-board growth in the overall market.
The best way to sum up the year: The tech-heavy Nasdaq composite index gained 86 percent--its best performance ever and slightly better than the Dow Jones industrial average's run-up in 1915.
|Complete 1999 results|
| Fourth Quarter |
Top 25 winners
Top 25 losers
Entire list alphabetically
"With the U.S. equity markets adding $3 trillion in value in 1999, investors should be satisfied," said Richard Cripps, market strategist for Legg Mason. "If you were aggressive in tech stocks, last year was like no other. But, if you were a conservative income investor, then it's a year you want to forget."
Interestingly, when the year started Qualcomm was hardly a blip on investors' radar screens--e-commerce was the buzzword. But as the year wore on, investors leap-frogged in Internet time from one story to the next: e-commerce, broadband, content, Linux, wireless, Net infrastructure and business to business.
Indeed, when Time magazine named Amazon.com chief executive Jeff Bezos its "Person of the Year" for 1999, plain old business-to-consumer e-commerce was old news to investors.
For example, Amazon's shares rose about 61 percent in the first three months of the year, but during the remaining nine months they actually slipped 12 percent.
eToys is another example of the shifting fortunes. The online toy seller went public in May at $20, the shares peaked in October at 86, and they ended the year at 26.
Meanwhile, wireless stocks such as Qualcomm and Metricom, up 1,400 percent for the year, stepped into the limelight and are still riding high.
Not only did Linux-related IPOs chalk up record-setting first-day gains, but the power of the penguin caused many sleepy stocks to perk up at the mere mention of Linux.
Investors are clamoring for Linux because the operating system, which is available for free, poses a threat to Microsoft's stranglehold on the market.
With the amount of money being thrown at Linux, it could become a self-fulfilling prophecy. The four publicly trading Linux companies--Andover.Net, Red Hat, Cobalt Networks and VA Linux--have a combined market value of $28 billion. (No wonder Microsoft president Steve Ballmer last year publicly criticized the high valuations of some new technology companies; without such massive investment, Linux probably would pose little threat to the software giant.)
As 2000 gets rolling, Linux is sharing center stage with wireless and business to business.
Why? Consumers are expected to account for about $15 billion in online sales this year, but businesses will buy and sell some $1.5 trillion among themselves in 2003. Some of the key names in the field include Commerce One and Ariba, each with market caps of about $14 billion, and BroadVision, up 1,500 percent in 1999 with a market cap of $10 billion.
| Top tech stocks for 1999 |
Of 402 tech stocks tracked by CNET, these were the 10 best and worst performers in 1999. (To qualify, the market cap had to be greater than $1 billion at the end of the year.)
|SunGard Data Systems||-40|
Indeed, in just the past two months a long list of investment groups, funds and companies have started funds aimed at seeding business-to-business firms. CMGI, one of the most successful Internet venture firms, launched CMGI @Ventures Business-to-Business Fund last month. The major consulting and services firms, including EDS, Arthur Andersen and Cambridge Technology Partners, also have gotten in on the action by launching well-endowed business-to-business venture funds.
Forrester Research estimates that the business-to-business sector will explode to $1.52 trillion in revenue in 2003 from about $131 billion in 1999.
Because of the relatively few business-to-business stocks available, the demand for these stocks is driving valuations of existing companies sky-high, analysts said.
Procurement software makers Ariba and Commerce One, online laboratory and equipment seller Chemdex, and business auctioneer VerticalNet, have garnered tremendous valuations--further enticing investors and putting business-to-business players on the fast track to initial public offerings.
There are two types of business-to-business plays: infrastructure players that develop and sell the software, such as Ariba and Commerce One, and those that act as middlemen between two or more businesses in specific industries, such as Chemdex.
"Going into 2000, expanding within the business-to-business industry will be the supply chain enterprise software makers that provide the means for businesses to run meaner and leaner," said J.C. Simbana, an analyst with American Frontier, a Denver-based brokerage firm. Simbana follows publicly traded New Era of Networks (Neon), a firm that provides software that connects disparate legacy software systems across the Internet, among other business-to-business players.
But Mark Ein, chief executive of Venturehouse Group, a Washington, D.C.-based venture fund focusing on the business-to-business market, believes that new infrastructure entrants are going to have a rough time gaining a foothold because of the momentum and huge market caps of the current players.
Instead, he is looking to industry niche players.
"The key to the success for them is to see who has been able to garner the support of the major players in an industry," Ein said. "Whoever manages to capture an industry--no matter what the industry--is the one in each industry that will be successful. Period."
Analysts and venture capitalists agreed that in either case, the companies that provide the hardware behind business-to-business commerce, such as IBM, Hewlett-Packard and Sun Microsystems, also will capture a tremendous windfall.
"They are in a great position because they sell arms to the armies--the raw material that everyone needs," Ein said.
Also worth noting in 2000 is the emergence of wireless access to the Net and how it will change the business-to-consumer market.
"Going forward, there will be a continued focus on how to get to the consumer--whether through cable, wireless or television," said Simbana. "These touch points are just another way to access a consumer to pitch them a service or product."
The recent deal between software giant Microsoft and cell phone maker Ericsson highlights the growing importance of Internet access through wireless networks. The day the deal was announced, other wireless stocks, including Motorola, blasted higher.
"Although Ericsson will not work exclusively with Microsoft, just the fact that Microsoft is looking at that space and wanting to get in says a lot to the financial community," said Elliot Hamilton, an analyst with the Washington, D.C.-based Strategis Group, a market researcher covering the wireless market. "The alliance tells (the financial community) that if Microsoft thinks it's important, then it must be going to be a big market."
With some wireless divisions of telecommunications companies outpacing the growth of the parents' main businesses, many telephone companies are spinning off their lucrative wireless divisions into separate entities, hoping to gain higher valuations on the tracking stocks.
Earlier this month, AT&T became one more telecommunications firm in a growing list to say it will issue a tracking stock for its wireless unit. Sprint and US West are among the telephone companies that already have offered tracking stocks.
Meanwhile, other broadband providers will need to shift their focus away from pure access services and more toward broadband applications, such as Internet protocol telephony (sending phone calls across the Net), streaming media content and gaming bundles.
"You will start seeing broadband (Internet service providers) market sexier bundles of applications in order to reach a mass market," said Zia Daniell Widger, an analyst at New York-based research firm Jupiter Communications. "They will need to convey a compelling broadband experience if they want to reach more than a niche market that is only interested in speed."