Ariba Finally Getting Recognized on Wall Street — But Why?

At the prodding of Spend Matters readers, I thought I'd share a few thoughts on the run-up in Ariba's stock price. Picking and analyzing stocks is not a core competency of mine, nor do I think stock prices should have any bearing on a company's decision to use a vendor's products or services, provided that the balance sheet is relatively clean. Still, I can't help but wonder if the interest in Ariba stock is a proxy for growth in sector overall. Consider that Ariba has finally broken through a number of price points where it has had significant resistance for well over a year -- and stayed there. Why is this?

First, I'll dispel with the acquisition rumors. Without question, I'd wager that Ariba executives have talked to folks like Oracle many times in the past whether they have wanted to or not (Oracle is such as acquisitive company that you can be sure that Ariba, with well over $100 million in annual revenue, would be on their list). But Ariba would never be a clean fit with Oracle given that a material portion of its revenue comes from operational advisory and consulting services -- not just technical implementation and configuration. And for the same reason Ariba is not a clean fit with Oracle -- or SAP for that matter -- because of its consulting business, its software business would not fit well with Accenture or IBM (though IBM is getting back into the packaged application business in some areas, so who knows.) In addition, Wall Street is looking for organic growth in companies now -- not acquisitions.

Hence, if we dismiss the acquisition rumor as the primary reason for the run-up, what is really behind it? Personally, I think that a number of factors are contributing to the stock price escalation and better analyst ratings. The first is the fact that Ariba has really proven out the On Demand model from a revenue perspective and investors like stable revenue models, especially in down markets. Granted, technically, they had some hurdles with some procure-to-pay implementations that I'm aware of earlier this year, but in general, they appear to be getting over these challenges and the numbers speak for themselves when it comes to investors, especially in the sourcing and contract management area.

The second reason that I believe the price has gone up is because of a general up tick in the demand for procurement and sourcing technology and services, especially in the volatile market that we're currently in (which is translating to new wins on the customer acquisition and customer up-sell front). As Hubwoo will also attest, companies can't afford to sit around and wait for the ultimate ERP Spend Management package to magically appear -- they must take action now. Ariba is benefiting from this directly, as are many other companies in the sector.

Third, and perhaps most interesting, is the fact that the market is wising up to Ariba's channel potential when it comes not just to the SIs -- relationships which Ariba has never successfully rebuilt to the level before they brought in the Arthur Andersen team, not to mention the FreeMarkets deal -- but to VARs and banks. Indeed, Ariba's downstream capabilities on the invoicing, payment and supply chain finance areas have got the chance to become a standard item on the pricing sheet for banks of all sizes to private label for their clients (it's already happening at one major bank and I'm guessing will happen at many other financial institutions). And from a VAR perspective, many of Ariba's solutions could be a good fit with small and middle market companies, if they can get the prices down to a point while letting VARs shoulder the customer acquisition expense.

These reasons for the rising stock price are merely speculative. And I'm sure that I'm missing some. But most important, I believe they're collectively indicative of the overall growth of the market. Let's hope that when the capital markets environment finally gets back on track, that other private companies such as Emptoris can take advantage of the interest and enthusiasm that investors are giving to Ariba. In my book, it's long overdue, and shows there's still a significant opportunity to translate emerging procurement needs into profitable and growing businesses.

Disclosures: I do not directly hold stock in Ariba or any of its competitors though may own mutual funds which trade in technology stocks. Ariba is, however, a client of my consulting firm, Azul Partners, and a sponsor of this blog, but we also work with over a dozen of Ariba's competitors in a commercial capacity as well..

- Jason Busch

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