Ariba (ARBA): Aiming to be a business-to-business eBay or Amazon

By Michael Cintolo, Editor of Cabot Market Letter and Cabot Top Ten Trader
From Cabot Wealth Advisory 5/10/12 Sign up for free Cabot Wealth Advisory e-newsletter

The market’s correction that began in early April continues, and I have to be honest; it’s been a bit deeper and more painful than I would have guessed a few weeks back.  I’m not referring so much to the major indexes (which are down 5% to 7.5% from their peaks) but to leading stocks, which were absolutely lynched from last Thursday through Tuesday of this week (May 3 through May 7).

The question is where stocks go from here.  I offer no predictions, but after the damage this week, I would say there’s a 30% chance that the panicky selloff this week will mark a sustainable low to this five-week correction … but more likely, a 70% chance that the market needs more time to repair the damage that’s been done.

Remember that when it comes to individual stocks, names that break down on huge volume have fallen off a motorcycle at high speed.  When that happens, the rider doesn’t just get up and keep riding; he needs some time in the hospital recuperating.  It’s the same with stocks, which need time to quiet down and ready themselves for new upmoves.

The good news is that it’s easiest to isolate strength when everything is falling apart.  So the main goal now is to keep an eye on stocks that (a) have found support at or close to their 50-day moving average, (b) are showing some big volume buying of late, telling you big investors are using weakness as a buying opportunity, (c) have reacted well to earnings in recent days or weeks, (d) have a growth story that you really believe in and (e) have enough liquidity (average daily dollar volume traded) to allow big investors to take positions.

One name I’m keeping an eye on is Ariba (ARBA), a small company with a huge story–it’s basically the eBay or Amazon of business-to-business commerce, with thousands of companies using the firm’s software and e-commerce network to cut costs or expand their base of buyers.  Here’s what I wrote about the stock in Cabot Top Ten Trader back on April 30:

“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 is changing all that, aiming to be something of a business-to-business eBay or Amazon; the company bills itself as the world’s leading business commerce network where ?rms of all sizes can connect to their suppliers online.  It’s a win-win for everyone involved–purchasers save money and gain visibility, suppliers bene?t 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 B-to-B 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 ?ve 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 week’s quarterly report showed that, if anything, Ariba’s business is accelerating as subscribers and network activity pick up.  We like it.”

The stock had a great run from 2009 to 2011, but then built a 10-month base during the second half of 2011 and the first four months of 2012. The company’s first quarter report changed that, with the stock catapulting from 35.5 to 39.5 in one day on one of its heaviest volume days ever.

Thus, looking at our criteria above, ARBA has remained above its 50-day line since early March, saw great volume buying of late (it’s also hovering near its highs despite the market’s decline), surged on earnings and has a big story that has plenty of growth ahead of it.

As for liquidity, the stock averages about $40 million of shares per day–a bit light, but it’s been heavier since the company reported earnings, and I’m thinking ARBA might be “growing up” as institutions take positions.

You could buy a small position (maybe one-third or one-half of what you would normally purchase) up here, but for my part I’m just watching and waiting for the market’s intermediate-term trend to turn back up.

Editor’s Note:  Mike Cintolo is editor of Cabot Market Letter, which Hulbert Digest (the keeper of the keys of newsletter performance) just announced was the fourth best-performing newsletter in the country during the past five years.  Mike has produced such returns by fine-tuning Cabot’s time-tested (since 1970!) stock picking, portfolio management and market timing rules to guide the Market Letter’s Model Portfolio—a concentrated portfolio of the market’s most dynamic growth stocks.  If you’re tired of being tossed around by the market and want to follow a proven editor with a proven track record, I highly recommend giving the Market Letter a try today.

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Company Details

Ariba (ARBA)
910 Hermosa Court
Sunnyvale, CA 94089
650-390-1000
www.ariba.com
Index Membership: N/A
Sector: Technology
Industry: Internet Software & Services
Full Time Employees: 2,432