Recently, I read a Pearlstein column in the Washington Post that's definitely worth a look for anyone interested in investing in software or education companies. Blackboard Inc. (NASDAQ:BBBB), one of my currently held stocks, has, in Pearlstein's words, "quietly become a dominant player in its market".
This article touches on several aspects of Blackboard that I especially like. Not just because I'm a DC resident and drive by their offices frequently, but also because I work in higher education and see firsthand the lock this company has on the marketplace.
It used to be that WebCT and Blackboard had split the market between them. There are a few other players and some schools design their own systems or cobble together a mishmash of systems. But there were only two real course management platforms for those who wanted something solid, reliable, and supported and two companies that could take advantage of that position in course management to get their tendrils into the rest of the computer system that runs every busy university.
And now there is one. WebCT was bought by Blackboard last year. While Pearlstein was quite surprised that this was approved by the antitrust police, the fact remains that it sailed through without much concern.
I'm sure this has been said before, but I don't intend to look a gift monopoly in the mouth. I have been looking to fill out my BBBB position over the past couple months but was frustrated to see the price popping on some nice analyst comments. Now, with the rest of the market recovering nicely, Blackboard is headed down. Perhaps this will be my opportunity to add on or perhaps I'll wait a little longer.
I don't believe this window of opportunity will remain open forever, though. Their difficulty in merging the two systems, converting customers, and building better margins with the new WebCT customers is going to depress earnings this year and possibly even next year, primarily due to the one-time merger costs. But when the company is stabilized and ready to drive growth, the margins should expand pretty dramatically over the coming years as they take advantage of economies of scale, a huge growth in their marketplace (technology use on campuses is growing quickly as are the numbers of students in both traditional and online schools) and near-monopoly pricing power.
This is still a fairly small market compared to those hit by corporate software providers of various stripes, which might be why Blackboard doesn't get that much attention (or it might be, as Pearlstein says, that being located in DC by the education associations isn't as sexy as being in Silicon Valley). But I think the market is certainly big enough to make this company shine. I am hoping to buy some more ... just a few more ticks down, please.
BBBB 1-yr chart:
Disclosure: Author is long BBBB