Marc Andreessen is a former entrepreneur (Netscape, LoudCloud) and now a very successful venture capitalist at Andreessen Horowitz. The firm made many home-runs investments in tech companies such as Skype, Facebook (FB), Groupon (GRPN), Zynga (ZNGA), Twitter, Airbnb, Instagram and Foursquare. Andreessen Horowitz's investments span the mobile, gaming, social, e-commerce, education and enterprise IT (including cloud computing, security, and Software-as-a-Service) industries. An article by Wired magazine reports that Andreessen saw five Internet trends before most experts:
1- 1992, Everyone Will Have the Web
2- 1995, The Browser Will Be the Operating System
3-1999, Web Businesses Will Live in the Cloud
4- 2004, Everything Will Be Social
5- 2009, Software Will Eat the World
In 2009, Andreessen and his longtime business partner, Loudcloud cofounder Ben Horowitz, created a venture capital firm called Andreessen Horowitz. Their vision today: an economy transformed by the rise of computing. Andreessen believes that enormous technology companies can now be built around the use of hyperintelligent software to revolutionize whole sectors of the economy, from retail to real estate to health care.
I expect vertical specialization to continue and there to be killer Silicon Valley style software companies in all kinds of verticals and categories in 2012 and 2013 that weren't viable three or five years ago.
E-commerce was the hotbed of vertical personalization of 2011, and big fat vertical expansion goes into other categories other than e-commerce in 2012. It could be content. It could be new kinds of service providers….Vertical slices or category slices can be available via smartphones and hooked to really powerful networks with cloud computing on the back-end. We're just seeing a pattern of companies doing this over and over.
He suggests that 2012 is the year that retail--retail stores--really starts to feel the pressure of disrupting competition. He thinks electronics and clothes are going to be at a real pressure point. On the other hand, e-retailers such as Amazon will continue to create huge value because these firms are providing a very differentiating customer experience that is much more like shopping as entertainment.
Companies such as Groupon and Foursquare and a whole new generation of these local e-commerce platforms are bringing online the gigantic number of businesses in the world that aren't on the Internet today at all. In a previous article, I mentioned some the opportunities and threats of Groupon.
For Andreessen, "People have really underappreciated what Groupon has done, which is they've created a way for small businesses that aren't online to spend money online and be able to dial up customers on demand. That's a really big deal….A lot of small business owners are going to start running their businesses from their smartphones."
Andreessen believes that many of the prominent new Internet companies are building real, high-growth, high-margin, highly defensible businesses: "My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy."
The winning conditions
Over two billion people now use the broadband Internet, and it could go up to five billion smartphones consumers in the next 10 years, giving every individual with such a phone instant access to the full power of the Internet, every moment of every day.
On the back end, software programming tools and Internet-based services make it easy to launch new global software-powered start-ups in many industries-without the need to invest in new infrastructure and train new employees. For instance, in 2000 the cost of a customer running a basic Internet application was approximately $150,000 a month. Running that same application today in Amazon's cloud costs about $1,500 a month. With lower start-up costs and a vastly expanded market for online services, the result is a global economy that for the first time will be fully digitally wired-the dream of every cyber-visionary of the early 1990s, finally delivered, a full generation later.
A good example of the phenomenon of software eating a traditional business is the "suicide" of Borders and corresponding rise of Amazon. In 2001, Borders agreed to hand over its online business to Amazon under the theory that online book sales were non-strategic and unimportant. Borders went bankrupt last year and Amazon's worth is now $103 billion.
"Health care and education, in my view, are next up for fundamental software-based transformation. My venture capital firm is backing aggressive start-ups in both of these gigantic and critical industries. We believe both of these industries, which historically have been highly resistant to entrepreneurial change, are primed for tipping by great new software-centric entrepreneurs," said Andreessen.
Marc Andreessen proposes that over the next 10 years, the battles between incumbents and software-powered insurgents will be fierce, demonstrating a "creative destruction" like economist Joseph Schumpeter found in the history of innovation waves.
4 stocks that could benefit from this trend
I try to come up with four interesting stocks in four sectors (e-commerce, healthcare, education, Internet advertising) that may heavily leverage the computing trend: "Software Is Eating The World."
E-commerce play: Mediagrif (MECVF.PK) is a very fast growing a e-commerce play involved in many verticals: Governments, Wine & Spirits, Computer, IT&Telecom, Automotive aftermarket, Electronic components, Diamonds & Jewelry, Classifieds, and Supply chain collaboration.
- P/E ratio is just 26x for a very fast growing firm in term of revenues and profits.
- Mediagrif offers a great play in the e-commerce sector. It offers also a good mix between organic growth and acquisitions.
- The valuation is still attractive event though the stock has increased 7x since 2009.
- The potential of LesPAC acquisition is still not completely valued in the stock.
- It has a low correlation with the Canadian stock market index, since the beta is 0.15.
Healthcare play: WebMD (WBMD) provides health information services to consumers, physicians and other healthcare professionals, employers, and health plans through its public and private online portals, mobile platforms, and health-focused publications in the United States. The company's public portals enable consumers to obtain health and wellness information, including information on a particular disease or condition; store individual healthcare information; assess personal health status; use online health and wellness trackers, tools and quizzes; receive periodic e-mailed newsletters and alerts on topics of individual Further, WebMD Health Corp. offers health and condition management programs, and telephonic health coaching services for clients of its private portals.
After I read a 2000 report "Beyond the hype: a taxonomy of e-health business models," I found out that few players had successful stories and one of the latest remaining independent player was WebMD. According to Yale Bock: "If you need a healthcare-related company and are willing to be patient and hang in there for a turbulent year, WebMD could be a good prescription for your portfolio." P/E ratio is just 18X but Forward 2013 P/E according to Yahoo is around 75x.
Education play: Apollo Group (APOL) through its subsidiaries, such as the University of Phoenix, provides online and on-campus educational programs and services at the undergraduate, master, and doctoral levels. The University of Phoenix is a for-profit institution of higher learning. The university has more than 200 campuses worldwide and confers degrees in over 100 degree programs at all university levels.
The University of Phoenix is one of the largest higher education providers in North America. Although the university attained a peak enrollment of almost 600,000 students in 2010, a 30% enrollment drop in 2011 has been attributed to operational changes amid criticism of high debt loads and low job prospects for its students, according to Wikipedia. These changes include allowing students to try classes before officially enrolling and recruiter training programs that are designed to improve student retention and completion rates.
University of Phoenix is the top distance learning university in the world. I teach for a distance learning university and the main obstacle for those universities is the recognition of the diploma on the job market. With its great reputation of excellence, graduates of University of Phoenix can have decent paying jobs in general, compared to other distance learning schools. Distance learning universities enable student to study at their own pace and also work at the same time if they want. More recently, U.K. Open University obtained great success with its iPad education application. The potential of mobile education on tablets is huge.
P/E ratio of Apollo is just 7x and forward 2013 P/E ratio is just 11x, according to Yahoo. It is a bet on a turnaround due to a promising technology trend and better management. However, it still has internal issues to deal with.
Internet advertising play: ValueClick (VCLK) is provider of Internet advertising solutions and online marketing services. ValueClick should benefit from the strength in the online advertising market (particularly display), the recently acquired Dotomi, international expansion, restructuring actions and strong cash flows. However, as firms with larger advertising budgets increase spending on Internet advertising, many of the services performed by ValueClick could be done in-house.
Internet advertising has a steady growth. Some analysts mentioned the discrepancy between the amount of time people spent on the internet and the lower proportion of advertising spending for the Internet versus other media such as TV, radio, and newspapers. Internet advertising spending is catching up in the proportion of overall advertising spending.
In its latest quarter, revenue jumped 42% Year over year due largely to strong performance from its recent acquisitions. Profits estimates have been raised for the next quarter. P/E ratio is just 17x and forward 2013 P/E ratio is also just 15x according to Yahoo.
Disclosure: I am long MECVF.PK.