If you were to scan over the companies in the Penny Share Letter portfolio, you mightn’t sport the pattern at first.
The first three stocks I’ve tipped all look very different. One is in the rail business, one is in the payments business, and one is in logistics. They’ve different backgrounds, and they’re working in different industries. But under the hood they’ve one thing in common.
It’s the strangest thing – when chatting to the CEOs of the companies, or of analysts covering them, I keep hearing more or less the same line:
“We’re really a software company that happens to specialise in[rail/payments/fleet management].”
A dirty old rail yard or a garage full of Transit vans isn’t where you might expect to find a flourishing software business.
But now, every fast-growing business is a software business. As March Andreessen put it: software is eating the world.
Software companies are breaking into every industry in the planet, and one by one they’re taking over.
As Andreessen notes the world’s biggest retailer, Amazon, is a software company. The biggest video service, Netflix, is a software company. The biggest transportation company of any kind by valuation, Uber, is a software company. The dominant music companies, Apple and Spotify, are software companies. The biggest entertainment industry: video games. The best new movie studio: Pixar. Corporate recruiter: LinkedIn. Bookies: Betfair. Hotels: AirBnb.
You get the idea! Those companies are hard to miss. You’re probably a customer of theirs. Or maybe you read about thousands of black cabs clogging the streets of London, in protest at Uber.
But those companies – the disruptors – are only half the picture. So much of software’s power is hidden from plain view.
As Venkatesh Rao has pointed out, many of big breakthroughs in genomics, 3D printing, or nanotech are all the indirect result of advances in software, rather than biology or materials science.
And corporate giants like Fedex, AstraZeneca and Goldman Sachs get their edge from a software “backend”. To succeed in business today, companies need to licence hire or acquire cutting edge software systems.
The software companies I’ve recommended in The Penny Share Letter fit into this second category. Their software systems are totally remaking the backend of dirty old industries like logistics and rail.
A turning point in human history
Rao calls software the “third major soft ology” in human history, after writing and money. It’s what historians call a “general purpose” technology, like electricity, steam power, writing, and money, metallurgy and agriculture.
In addition to being “general purpose”, soft technologies can take many forms, and can be embodied in almost anything. That’s what makes them so powerful. Rao argues that since the year 2000, software has come of age as the third major soft technology in human history.
The black cabbie protests against Uber, billion dollar “unicorn” startups. The rise of Silicon Valley… they’re all just symptoms of the emergence of this new technology.
Once you start to look for it, you see it everywhere. And it’s certainly to be found among the fastest growing companies in the market.
The London markets, and Aim in particular, are full of promising fast-growing software companies. Often they don’t describe themselves that way.
Usually you’ve got to dig a little into their business before you can recognise it. But among the best and fastest growing companies, software is always central to what they do.
I’m on a permanent hunt for these companies for my Penny Share Letterreaders. If you want to see more of what I do, click here.
Have a good weekend!