Ariba, Stock Run Ups and Equity Research

I continue to be surprised at the run-up in certain tech stocks, driven in part by many analyst reports. This suggest to me that at least some of the so-called experts covering various markets really don't have much knowledge of the underlying customer issues driving the buying of the software/services they're covering (and they'll probably have less, now that "tech informant shops" providing channel check information for a fee are under investigation by the FBI for providing what some think is insider information).

Ariba is a great case in point. From an investor standpoint, there are a number of things to like about the business. For one, the latest Quadrem acquisition is one of the best revenue arbitrage/multiple games I've seen in some time (it's also a good network volume consolidation move). To wit, take revenue away from a company that's privately valued as a shared service and then call it cloud or network revenue and it magically transforms from a 2X to a 4X+ multiple. Yet there are other things about the company and network business model that I think present risk, from my view of their limited solution innovation vs. the competition to customer/supplier assumptions that I disagree with on network price increases when it comes to ultimate pricing power and control. Like nearly all investment opportunities, there's good and bad that go with it.

But I don't think reading many of the analyst reports or articles that simply talk about a tech stock breaking through price resistance points will get you very far in understanding the fundamentals of the business nor why customers are, or aren't, inclined to use a vendor's solutions. Seeking Alpha occasionally gets things right if you know the right authors to follow, but if you're serious about investing in technology over the longer-term, do more homework yourself. Here are some suggestions for how:

  • Read blogs or op/ed columns in publications from those who are clearly in the know -- ideally multiple blogs on a sector (if applicable). Try to get multiple opinions from those close to customers in the respective markets. In many ways, being close to the vendor is less important, as vendor spin accounts for 95% of what you'll read about a provider from many news sources, including blogs (e.g., the bulk of the news coverage of the Quadrem/Ariba deal was regurgitated press release and interview material, with limited or no research or outside opinion included)
  • Develop friends and contacts in the systems integration, VAR and consulting worlds. Consultants and other third-parties without a financial interest in software itself can provide great information from their engagements about how customers actually use (or don't use) systems they've invested in, even if they're not experts in the software itself. If you're an investor, avoid any potential insider information by not asking about new deals or related matters. Stick to the fundamentals of how the applications work and what customers think of them
  • Listen to earnings calls, especially the analyst Q&A. 80% of the questions may be irrelevant, but how management responds to certain ones are often a great "tell." When CEOs and CFOs are on the spot, especially about new products, the competition, customer adoption, etc., they often reveal much more than in scripted remarks.

Not than I'm an expert in any of this. I'm currently examining my retirement account to see if it makes sense to make any broad tech bets (like Microsoft) and I can make equal arguments that MSFT is either a ridiculous bargain given the yield, cash position, etc. or a dinosaur looking at a comet heading to earth. But I'm doing my own investing homework, eating my own suggestions and dog-food, to arrive at the best answer. And if you're curious, I don't invest in the procurement or supply chain sectors because I'm too close it.

Disclosure: I do not maintain any positions in Ariba or other procurement/supply chain stocks.

Jason Busch

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