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Rising Star Buy: InnerWorkings

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This article is part of our Rising Star Portfolios series. Sean is co-manager of the Dada Portfolio.

One of my favorite philosophical traditions from which to draw eternally relevant aphorisms is Daoism. Perhaps not as well known to the Western world as famous names like Zen or traditional Buddhism, in Chinese, Daoism is simply known as "the way" and espouses a philosophy of attaining harmony with the universe. But a key nuance is recognizing that harmony is not static and unchanging; harmony involves understanding that everything is forever in flux and that as the universe changes, so must the individual.

The Dao of printing
While you ponder that spiritual insight, let me now argue that we may find investing and business wisdom in that truism as well. Take the printing industry: While it's become fairly standard business practice to outsource a company's payroll management to ADP or website hosting to Rackspace, a lot of companies still haven't recognized the efficiency of outsourcing their printing needs. On the surface, it seems simply arcane: Why keep such a specialized operation in-house? That's anachronism No. 1: The universe has changed, but outdated printing practices have stubbornly remained.

Anachronism No. 2: Those organizations that have brought themselves past the 19th century have, on the whole, refused to enter the 21st. Back in the glorious 1990s, for instance, if I bought a book it'd be from the local bookstore. I didn't know if I was getting a decent price, but I didn't really have much of a choice. Fast-forward 10 or so years: I now buy books from because I know it'll aggregate and find the cheapest suppliers and give me, the customer, the absolute best price anywhere. Makes sense right? Yet again, the printing industry and its customers have steadfastly refused to acknowledge the myriad efficiencies that having this sort of centralized, aggregating network can deliver. Joe Company goes to Jane Printer for no other reason than, well, that's just the way it's always been done.

Disruption: An act of delaying or interrupting the continuity
With two major Luddite holdovers, the printing industry has been in need of a disruptive savior for a long time. InnerWorkings (Nasdaq: INWK  ) may just be its Moses. The company commenced operations in 2002 and has grown revenue from $5 million to $460 million. At the heart of this miracle growth has been PPM4, InnerWorkings's proprietary software platform that aggregates the company's supplier network, figures out who in this network can do a given job at the best price, then passes on the savings to its corporate clients.

To be clear, InnerWorkings doesn't do any in-house printing. But unlike other print brokers, the company doesn't rely on just an old boy's network. InnerWorkings consolidates information on more than 8,000 printers – their equipment, their capabilities, past jobs that they've run, and the prices they ran them at. When an organization comes to InnerWorkings for a print job, a procurement manager can search through this vast database to find the best price and service to offer the client. Jane Printer simply can't match that nationwide network and that flexibility.

The opportunities
The key challenges for InnerWorkings are (1) getting prospective customers to realize how much the 21st century can benefit them and (2) scaling up and building out that network and the eBay-like moat that comes with it. As far as the first part goes, I had the opportunity to talk to CEO Eric Belcher last Friday and asked him: "Why, if your solution is so great, aren't you seeing stampeding hordes knocking on your doors?" In my humble estimation, the answer can be entirely explained by this seemingly unrelated statistic: Sales of VHS cassettes in Britain more than doubled from 2008 to 2009. Seriously, guys? Do you not have DVDs, Netflix, or iPads across the pond? (That was a rhetorical question.) In any case, people hold on to what they're used to, so Mr. Belcher, as far as my first point goes: Good luck.

But as for the second point, the company had an exciting announcement on Friday that the market completely overlooked. InnerWorkings is going international with the acquisition of CPRO, a South American print manager. The purchase adds a new group of suppliers and set of capabilities for the InnerWorkings network. Beyond that, it's a sign that the company not only has its eye on the $400 billion global print market but has the gumption to move on it.

The great thing is how early we are to this story. Belcher noted that InnerWorkings has less than half a percent of the total U.S. printing market (traditional printing powerhouse R.R. Donnelley (Nasdaq: RRD  ) has more than 20 times the sales). But flip that coin and you'll see that's a lot of people who might end up reading the Wikipedia article on Daoism -- and a lot of revenue for InnerWorkings once they start selling their VHS tape decks. In any case, the Dada Portfolio wants to be there once the exodus begins. We're going to buy a $500 starting position of InnerWorkings stock. That will represent an approximately 3% position in our portfolio from which we can watch this story unfold. We invite you to join us.

Leave us a comment on our discussion boards and let us know why you still regret trading away your VHS player. You can also follow the Dada Portfolio on Twitter @TMFDada.

The Dada Portfolio is a part of the Rising Star series of real money portfolios. It is co-managed by Sean Sun and Ilan Moscovitz.

Sean owns shares of InnerWorkings and Rackspace Hosting is a Motley Fool Rule Breakers pick. and eBay are Motley Fool Stock Advisor selections. Automatic Data Processing is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2011, at 10:52 AM, daw1768 wrote:

    Are you concerned with INWK's relatively low operating margins within the commercial printing industry?

  • Report this Comment On February 09, 2011, at 10:00 PM, TMFSun wrote:

    That has more to do with how INWK books revenue and COGS than with their operations. They actually take printing jobs onto their own books before immediately reselling it over to their clients -- so their gross profit line is actually a better reflection of their revenue than what they report under GAAP. From that perspective, their operating margin looks a lot better at ~13%.

    Thanks for the question!


  • Report this Comment On February 26, 2011, at 12:53 AM, RMvandy wrote:

    INWK appears to have no presses or highly trained pressmen, no huge facilities to feed the web of paper into the press, then to the cutters, folders, collaters, sorters, binders and boxers, then the shipping dock. (Or, for direct mail, addressing, secondary sorting, bagging....) No warehouse for the variety and volume of paper it'll need for the current work and the output prior to shipping. Oh, and none of those machines that have to be operated and maintained by expensive, trained labor.

    Low margins? They don't have to set hot type or reprogram digital documents, scan images to produce printing plates, or dispose of processing chemicals and cleaning solvents.

    All they do is receive, forward, and monitor work to real print shops, and take a commission.

    Sounds like a good business plan.

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10/21/2016 10:45 AM
INWK $8.92 Down -0.27 -2.94%
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