BEAS one-year stock performance chart

Last week, Richard Williams, an analyst at Jefferies & Co., based in New York, upped his 12-to-18 month price target on BEA Systems to $150. Williams’ previous target, set just last September, was between $40 and $42. "We’ve blasted right through that," he says.

Williams says his current price target for BEA Systems’ stock "is based on a new set of parameters." Those include the company’s success in the marketplace, carefully targeted acquisitions, and an anticipated rush of new customers for the firm’s e-commerce application server software and related products and services. "The business world has been shocked into realizing the Web channel can’t be ignored," he says. "BEA Systems provides the plumbing to do business on the Internet reliably and scalably."

Williams’ move follows an upgrade by Tim Klasell, an analyst at Dain Rauscher & Wessels, based in Minneapolis, who several months ago raised his rating on BEA System’s stock to "strong buy" from "buy" and increased his 12-to-18 month price target to $110 from $140.

"That’s subject to upward revision," Klasell now says, adding that $110 a share is looking "pretty conservative" to him at the moment.

San Jose, California-based BEA Systems was originally founded in 1995 as a software company specializing in middleware. Middleware is typically used in intra-enterprise environments for transaction processing, for example, helping a company reconcile inventory with customer orders and shipping dates.

More recently, BEA Systems turned its attention to Internet-based e-commerce server applications, mostly through acquisitions. Last year, the company acquired San Francisco-based WebLogic Inc., which had already sold its Java-based Web-application server to more than 800 business users.

Last summer, BEA Systems bought three other firms: Avitek Inc., based in Boulder, Colo.; Component Systems Inc., based in San Jose, Calif.; and Technology Resource Group Inc., based in Maynard, Mass., all of which specialize in software-component technology. Software components are reusable blocks of software that can be quickly assembled for different complex system functions. The acquisitions were rounded out by this month’s purchase of Boston-based Theory Center, another Java-based software-development firm.

"BEA is pushing into the e-business market," says Yefim Natis, vice president and research director at the Gartner Group, based in Boston. "The first steps they’ve made have been brilliant and account for the stock’s performance. They acquired immediate leadership and technology in the Enterprise JavaBeans (EJB) market."

David Truog, an analyst at Forrester Research, based in Cambridge, Mass., says BEA Systems’ emphasis on open-standards-based Java software technology is one of the reasons he’s optimistic about the firm’s prospects moving forward. "I’m not surprised at the $150 price target," he says. "I feel a lot more comfortable with that lofty projection than I do about a lot of the lofty projections for some of the online retailers."

Truog says BEA Systems’ Java-based approach is "invigorating the market because it helps customers avoid single-vendor lock-in." That kind of lock-in could occur, he says, if businesses buy similar non-standards-based software, such as Microsoft’s Windows NT-based systems. "It’s immensely easier for customers to switch from one vendor to another if the software is based on open standards. It gives them more reliability, better service, more choices, and better prices."

The numbers seem to back him up. Last week, BEA Systems announced a two-for-one stock split, coming off a record third quarter that showed operating income of $14.4 million on revenue of $126.5 million, representing an increase of 84 percent and 56 percent, respectively, over the same period last year.

"We’re starting to see multi-million dollar deals," Steve Brown, BEA Systems’ chief financial officer, told an industry group meeting in San Francisco last week.

According to Brown, BEA Systems signed up more than 50 new dot-com customers over the previous quarter, while another 13,000 potential users downloaded trial versions of the firm’s software over the previous month. "There’s just an unlimited demand for our consulting services," he says. "We try to tie consulting projects to licensing agreements." Revenue from both service and licensing operations have shown strong growth recent months, Brown says.

"With 270-plus sales people all over the world, BEA Systems is the largest pure-play stock in the application-server group," Klasell says. Like the Forrester analyst, Klassel says BEA Systems’ focus on Java technology has helped make the company an early winner. "We believe [Java] is becoming the standard in transaction processing and enterprise software in general."

Natis generally shares the enthusiasm about BEA Systems but cautions investors not to bet too heavily on the company, based solely on its blue-chip roster of customers. Those customers include Amazon.com Inc. {AMZN}, DirecTV, E*Trade Group Inc. {EGRP}, FedEx, and United Airlines. "Take E*Trade, for example," Natis says. "E*Trade is using products from BEA Systems and from Netscape. Each company claims E*Trade as a customer, but they don’t mention the other."

Despite their generally positive reviews, analysts say BEA Systems faces a growing number of challenges. At the moment, the company’s most formidable competitor is IBM {IBM}, but Oracle Corp. {ORCL} and the Sun Microsystems Inc. {SUNW}/Netscape alliance are also aiming at essentially the same market.

"Basically, BEA Systems is an interesting upstart with the potential to play out in the long run, despite the fact it is not one of the big boys," says Frank Gillett, senior analyst at Forrester Research.

Natis says there are still two remaining weak links in the BEA Systems software arsenal, productivity/development tools, and stronger application integration features, which help customers take better advantage of their preexisting information-technology infrastructures.

"The company has been dragging its feet in those areas," he says. "But I expect within the next 12 months, we’re going to see some significant news on those fronts."