B2B Leaders Fall on Prudential Downgrade
By Cindy Christ

Nobody stays on top forever.

Recently coveted as the market's hottest stocks, shares in business-to-business electronic commerce companies, the so- called B2Bs, got the ax Friday, as investors sold off shares following a Prudential downgrade.

In a research alert, Prudential Securities analyst Douglas Cook cut his ratings on three industry highfliers, Ariba Inc., Commerce One Inc., and i2 Technologies Inc., to "accumulate" from "strong buy."

Cook lowered his 12-month price target on Commerce One to $200 from $250, cut his target on i2 to $150 from $200, and maintained his target on Ariba of $250, noting he expects a compression of the stocks' multiples.

Cook based the downgrade in part on concerns about the companies' continued ability to command transaction fees from customers. All three use a transaction-based business model, which demands a cut of lucrative fees charged on each purchase or sale, and often an equity position in the trade exchange as well.

Database behemoth Oracle (ORCL), which has done a masterful job of transforming itself from an enterprise software maker to major B2B player, has said it won't charge transaction fees.

"Increased competition is going to spoil the ability of these companies to demand equity in the trade exchanges and revenue sharing," Cook wrote.

Cook also questioned whether the fledgling companies' have the manpower to execute the online exchanges and offer equal service after signing major deals with a number of large, influential companies.

"We assume each of these customers will demand levels of service from their technology partners that assumes no other customers exist," Cook said. "As a result, we believe focus will increasingly become a key fundamental risk among these three vendors."

Since going public last year, Commerce One has inked deals with General Motors, Boeing (BA) and Lockheed Martin (LTM), Ariba with Chevron (CHV) and Cargill, and i2 with Toyota (TM) and Compaq Computer (CPQ), among others.

Despite the downgrade, Cook said he remains upbeat about the three companies and anticipates earnings surprises in their upcoming reports.

Shares in Ariba (ARBA) lost $10.38, or 4.7 percent, to $209.63 after trading as low as $177.94 intraday. Commerce One (CMRC) fell $24.06, or 13.9 percent, to $149.25, bouncing back from $135.50.

i2 (ITWO)dropped $6.88, or 5.3 percent, to $122.13, trading as low as $98 mid-session.

Needham & Co. rescued the B2Bs from the day's worst selling by issuing a "strong buy" rating on Ariba and a "buy" on Commerce One.

With the Nasdaq now being dubbed the "Nasdog" and Wall Street's latest big hitters on the bench, investors can't help but wonder who's on first.