In the most recent edition of the The Motley Fool's Internet Report (available later this week) Jeff Fischer and I take a close look at what has been a white-hot industry on Wall Street of late: business-to-business (B2B) e-commerce. While researching and writing about the industry, I couldn't help but think that B2B had many of the qualities that we look for in a Rule Breaking industry.
It wasn't that long ago that here in Breakerdom the only way we really determined if an industry was worth further study was to look for an industry that was "important and emerging." However, in the currently ongoing Rule Breaker seminar, our fearless leader David Gardner gave some further guidance into what he considers important qualities of industries that are likely to yield a few Rule Breaking companies. Below are the three general qualities and how B2B stacks up in each.
Huge Growth Curve
One of the things I love about Fooldom is the verbiage that we are allowed to use as writers. "Huge Growth Curve" is a phrase no academic financier is going to get caught dead coining. It's vague and too "simple" sounding. Nevertheless, it's Foolish and describes perfectly what we're looking for.
Regarding B2B, there are literally dozens of different research firms publishing market size estimates for the years ahead. They all essentially say the same thing -- transactions between businesses over the Internet is going to be huge. The most quoted research firm is probably Forrester Research, and Forrester expects the value of goods and services exchanged online B2B to go from approximately $130 billion last year to near $1.5 trillion by 2003. In other words, there's absolutely no doubt B2B has a mongo growth curve.
Wide Scope
In our seminar, David recently described this characteristic as follows: "Wide scope means that it drills down in ways that really matter into the very lives of millions of people around the world. It means that the prospects for that industry appear unlimited -- that the greater the industry grows, the greater the likelihood it will grow even more."
I think this perfectly describes what we are seeing with the B2B industry. B2B companies of all shapes and sizes are aimed at making the interactions between businesses much more efficient. To my knowledge, every single company on this planet can benefit from increased efficiency and reduced expenses.
How B2B works may not be something we can readily see on the surface, but we'll all benefit as companies are able to produce more products for less cost. The ways in which smart B2B firms can use the Internet to make business processes more efficient is really only limited by our imagination.
Beyond the Growth Curve
This third industry quality is completely non-technical yet again, and that's exactly how we like it. Basically, what we're looking for is an industry that has the potential to morph into something else that also has a huge growth curve. We're not looking for industries that will grow explosively and then plateau. Rather, we're looking for ones that have the possibility to branch out into new areas. To be concise, Rule Breaking industries can also spawn entirely new industries.
B2B is actually a branch created from the larger Internet industry, and it is perhaps the most important and relevant to date. This is because B2B addresses an enormous market opportunity thanks to the fact that most businesses are still extremely fat and inefficient. The possibilities for adding value by cutting this fat is nearly immeasurable.
Oh, and remember that "$1.5 trillion by 2003" figure I quoted earlier? That's only for domestic B2B e-commerce. Extend that to international markets and the addressable market size is probably well over $2.0 trillion by 2003. I'm not even going to venture a guess as to what the global size of B2B e-commerce will be 10 years from now, but it's safe to say that the vast majority of businesses are going to be online by then.
All in all, I think that B2B e-commerce is an industry that is worth further exploration for potential Rule Breakers. While we don't have the space to really break out who's who in the B2B space, below are listed some of the top dogs in the B2B roughly sorted by their market capitalizations.
B2B Top Dogs:
Internet Capital Group (Nasdaq: ICGE)
I2 (Nasdaq: ITWO) (See today's News and Daily Double)
Siebel Systems (Nasdaq: SEBL)
Ariba (Nasdaq: ARBA)
Bea Systems (Nasdaq: BEAS)
MicroStrategy (Nasdaq: MSTR)
CommerceOne (Nasdaq: CMRC)
Vitria (Nasdaq: VITR)
VerticalNet (Nasdaq: VERT)
FreeMarkets (Nasdaq: FMKT)
Ventro (Nasdaq: VNTR)
I think it's safe to say that some of these firms are going to show the types of spectacular returns we expect from our Rule Breaking companies. In fact, most of these stocks are already 10-baggers over the last year, but we actually LIKE high relative strength stocks since it's an indication we may be onto something. Either way, they are all operating in what many, including myself, think will be one of the industries that will add the most value to the global economy over the next decade.
But don't take my word for it... study it for yourself!
