This phenomenon took shares of Facebook (Nasdaq: FB) down as much as 8% on 2012 fourth-quarter earnings, because the company has not been able to break into the space. It is the reason why Michael Dell intends to buy back the company he founded and why shares of Hewlett-Packard (NYSE: HPQ) have plummeted 40% during the past year.
I'm talking about the massive shift to mobile computing and, more specifically, how to make money from it.
"In 2016, two-thirds of the mobile workforce will own a smartphone, and 40 percent of the workforce will be mobile," said Gartner's Research Vice President Carolina Milanesi.
In just two years, mobile computing is expected to be a $330 billion market, according to consultancy firm Clearwater.
It's no wonder why everyone wants a piece of this pie.
The problem is, no one really knows how to get there. Facebook for example, even though mobile revenue increased to 23% of total sales on its 2012 fourth quarter, it still disappointed analysts. And as I've noted earlier, the stock plummeted. Chinese search giant Baidu (Nasdaq: BIDU) -- the Facebook of China -- dropped 10% on Feb. 5 on its inability to move into the space without incurring steep transition costs.
When mega-cap companies aren't able to break into a technological shift and shares start to tumble, I look to the more flexible and innovative small caps leading the charge. These startups often hold the proprietary technology and patent rights to the software that will either give them explosive growth or make them takeover targets of the big players.
When it comes to monetizing mobile technology, there is one company putting everything together.
One of the fastest-growing software companies in the world
Last year, Software Magazine named this company one of the fastest-growing software firms in the world. It grew revenue by 55% in 2011 to $207.6 million and is expected to reach $287.5 million in 2012.
By 2016, revenue could reach $1.6 billion on conservative projections for market share and growth in mobile advertising. The meteoric growth in revenue is built on two underlying advantages this company has over its competitors: Proprietary technology and the ability to integrate advertising campaigns for clients across multiple channels including email, mobile, social media and, of course, the Web.
ExactTarget (NYSE: ET) is leading the industry into interactive marketing across different channels, especially on smartphones through its proprietary applications MobileConnect and MobilePush. These mobile applications enable clients to create, automate, deliver and optimize the performance of personalized inbound and outbound messaging.
While competitors and the likes of Facebook and Baidu are struggling to monetize traffic on the mobile Web, ExactTarget has figured out how to do it across multiple delivery methods. This means advertisers see a more integrated and efficient return on their ad spending. Through its software, the company helped a client increase on-hold purchase recovery by 50% through a personalized campaign targeting customers that did not complete their orders through the website's shopping cart. The company's MobilePush application is the industry's first to enable marketers to integrate in-app messaging across email, SMS, social media and the Web.
ExactTarget receives most of its revenue (81%) domestically, though international revenue is growing at a faster rate and is expected to increase dramatically in the future.
Triple-digit growth in online advertising and a 140% upside in shares
The global market for online advertising in email, mobile and social interactive marketing could reach $55 billion by 2016, according to Credit Suisse. This represents an increase of 414% from the $10.7 billion reached in 2011.
ExactTarget currently holds about 2.9% of the global market for cross-channel interactive marketing. At an estimated $55 billion in 2016, this represents revenue of $1.6 billion, or 454% compared with the projected $287.6 million 2012 revenue. Assuming the sector's average net margin of 5%, this translates to earnings of $1.18 per share and a stock price of $53.10 at a trailing price-to-earnings (P/E) ratio of 45. This is a gain of 140% from current levels.
Investors may not have to wait for the rest of the market to catch on to this growth story. The company's small $1.5 billion market cap and proprietary technology positioned in the fast-growing segment of mobile advertising could very well make it an attractive takeover target. Shares jumped 6.8% in December 2012 when Oracle (Nasdaq: ORCL) announced the takeover of competitor Eloqua (Nasdaq: ELOQ) for $23.50 a share, a 31% premium on the pre-announcement price.
Risks to Consider: As a small-cap company yet to be profitable, the shares are bound to be volatile. Investors need to be ready for large swings in the price.
Action to Take --> ExactTarget is on the forefront of the industry's future with revenue growing at a double-digit pace annually. Earnings should catch up quickly to the stock's valuation and the investment could easily double in the next few years.