Making B2B Commerce Sexy

05/08/2012 10:30 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

When talking tech, usually it's the consumer space that gets all the attention, but that doesn't mean there aren't some compelling companies on the business network side, says Mike Cintolo of Cabot Top Ten Trader.

Even in today’s world of smartphones, tablets, and high-speed networks, most business commerce is still conducted manually and with paper invoices and payments.

Ariba (ARBA) is changing all that, aiming to be something of a business-to-business eBay (EBAY) or Amazon (AMZN). The company bills itself as the world’s leading business commerce network, where firms of all sizes can connect to their suppliers online.

It’s a win-win for everyone involved—purchasers save money and gain visibility, suppliers benefit from a huge and expanding base of buyers, and Ariba makes money from all of them through subscriber fees and per-transaction earnings.

The potential going forward is truly enormous; Ariba’s network handles $300 billion of transactions every year, but that’s just 10% of what its current customers spend in B2B transactions, so even if no new customers are inked there’s still plenty of upside. (The goal is to get to $1 trillion in the next five to six years.)

We see no reason why it can’t get there, as the company is the leader in just about every B-to-B segment (sourcing, procurement, invoice management, working capital management, etc.). And it’s already a global player, with about 40% of revenues coming from outside North America.

Of course, there’s always a fear that if the global economy sputters, so will business spending, but last month's quarterly report showed that, if anything, Ariba’s business is accelerating as subscribers and network activity pick up. We like it.

ARBA had a fairly persistent advance from late 2008 (at $6) through July of last year (to $37), but it was hit hard by the market’s mini-crash. It has been base-building ever least it was until recently, when the company’s stellar earnings report caused shares to erupt to new highs on more than five-times average volume.

To be fair, ARBA has never been an institutional darling, but it’s possible the stock is beginning to “grow up,” and we like the look of last month's breakout. You can buy some here, and we suggest a loose stop around $34.

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