Commerce One Feels the Bite

Just what are shareholders to make of Commerce One Inc. (CMRC) ?

Shares of Commerce One fell 19 percent Tuesday. The stock seemed to be regaining its former glory only a few days ago, having doubled since early July.

Commerce One was once one of the great glories among Internet stocks. A year ago, it was trading at $15 a share (split adjusted), it rose as high as $165.50 in the haze and craze over all things b-to-b, and having fallen along with everything else in March and April, had fought its way back to $79.50.

Then along comes a report from Jeffries analyst Richard Williams. Before the market opened Tuesday, Williams suggested the company would see slowing sales from large companies. Williams didn't suggest the company would fail to deliver on his estimates for third-quarter revenue, but he did lower his estimate on the stock from a tepid "accumulate" to a "hold," which is Wall Street code for "Head for the hills!"

It was the suggested content of the report that had Wall Street alarmed. Williams framed his report on some independent research, namely a "channel check." This is when analysts go to customers of a given company and find out what demand was really like. Since most analysts simply take their cues from the companies themselves, a channel check is the kind of grassroots research the Street loves.

Williams said what he found was disconcerting. After talking to companies that are potential clients of Commerce One, he said they expressed concern about spending in the coming quarter. "We think sales momentum could begin to decelerate over the next quarter or two," Williams wrote. He specifically cited "slowing business from the systems integrators [and] demise of the 'dot-coms' " that reduces "the urgency of brick-and-mortar companies to get online."

It was a two-page report, but it was enough to destroy $2.3 billion in market capitalization. But what does this say about Commerce One itself?

As my colleague Eric Young pointed out, Commerce One is working toward a different business model than its chief competitor, Ariba Inc. (ARBA) . Though half the size of Ariba in terms of market capitalization, Commerce One is making a bigger bet on business-to-business by taking stakes in the very exchanges its software empowers. So it follows: If Commerce One works, shares of its stock will work in spades.

Ultimately, the problem at Commerce One is the problem of so many dot-coms - lack of profit. Though the company brought in $97.7 million in the past six months, Commerce One's loss totaled $86.8 million in that period, more than three times the loss in the previous six months.

"You can talk about price-to-sales or growth rates or price-to-growth rates, but the bottom line is the bottom line," says Steven Kaplan, a professor specializing in b-to-b at the University of Chicago Graduate School of Business. "Until these companies make money, there will be no true way to judge the benefit of their product and no way to judge their success."

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