Digital information is being created at a monstrous pace with the explosion of Web applications, e-commerce, online transactions and social media. Companies that track, store, analyze and provide database solutions are poised to benefit from the growing big data trend.
Investors looking to get in on the ground floor of stocks that have the sizzle of fledgling dot-coms may find that big data companies offer attractive opportunities. "As a species, we now collect and store somewhere between 2 and 3 trillion megabytes of data per day. A lot of that is raw noise, but the patterns that shine through can be extremely valuable to corporate management looking for operating efficiency, better-targeted marketing or even just quicker damage control when the chatter starts going the wrong way," says Hilary Kramer, hedge fund manager, equity analyst and editor of several financial newsletters.
Looking ahead, data creation is expected to only increase in the years ahead. "We are seeing an explosion of data that is being created within both the consumer and corporate area. Our view is that you will see data growth in the range of 30 to 40 percent on an annualized basis over the next decade," says Angelo Zino, senior industry analyst, equity research at S&P Capital IQ.
The key trends driving expansion in big data include growth in the mobile space as consumers create new data via their phones, the adoption of the cloud and social media, Zino says. "You are able to capture a lot more data today than ever before, and mobility is driving that," he says.
Every device with an embedded processor creates data, and theoretically all of this data could be analyzed and used for business needs. "It's estimated that just over 10 percent of data is generated by machines, but industry analysts expect that to rise to 40 percent within the next five years or so. Earlier in the year, IBM stated that around 90 percent of the data created by mobile and smart devices is never analyzed, meaning there is a massive opportunity," says Tyler Laundon, chief analyst of small-capitalization stocks and growth stocks at Wyatt Investment Research.
Potential stocks run the gamut from mature companies like IBM, which keeps folding new big data applications into its Watson analytic platform, to relatively small plays. "The immediate appeal for investors is that there's vast potential growth here in a market that's otherwise starving for signs of the next high-tech revolution," Kramer says.
Here's a look at five stocks analysts like now:
International Business Machines Corp. (ticker: IBM) is a major player in the enterprise software, IT services and hardware arena. It may be an old-school stock, but it does offer exposure to the big data trend. "IBM shares look undervalued, and the company does have some exposure to big data, though it is a legacy player and has a lot more going on than just analytics," says Pete Wahlstrom, director of technology equity research at Chicago-based Morningstar, an investment research firm. Morningstar rates "fair value" for IBM at $178 per share.
IBM has become increasingly focused on big data and Watson analytics, Laundon says. "Earlier in the year it announced plans to invest $3 billion to build an Internet of Things division. This specialized division will work to harness and analyze the vast amount of data collected and created by tablets, smartphones and connected devices. IBM's push into big data could help the entire space over the next year by increasing [merger and acquisition] speculation and investor interest," Laundon says.
Hortonworks (HDP) is a leading player in the database solution space. "The company essentially sells the 'picks and shovels' to would-be data miners, especially smaller businesses that may not have the scale to support their own supercomputing solutions or hire IBM," Kramer says.
On a relative basis, Hortonworks is still a small player in the overall tech world, with revenue now cresting more than $80 million a year. "It's still burning roughly that much cash as it ramps up. Granted, the company is expanding its bookings at a rate of 40 to 50 percent a year as Fortune 500 partners roll out their big data programs on top of the HDP platform, so this play could pay off within a matter of years," Kramer says.
Splunk (SPLK) is a firm that specializes in machine-generated data. "This is data that is produced by all varieties of electronic devices, including home appliances, electrical meters, mobile devices, automobiles, medical devices, GPS devices and radio-frequency ID tags, among others," Laundon says. "Splunk makes money, in part, depending on how often subscribers access data sets and how much data they sift through. The more data users can access, the more desirable the platform becomes, and the more revenue Splunk will generate."
EMC Corp. (EMC) is a leading provider of IT storage hardware solutions to promote data backup. S&P Capital IQ has a "strong buy" on EMC, with 12-month target at $30. "EMC is the name we are telling investors to buy when it comes to big data," Zino says. EMC has an attractive financial position with net cash per share over $4.50, he says. "This will allow them, if need be, to capitalize on potential acquisitions. We view the sum of the parts as greater than the whole. The market is significantly undervaluing its assets," Zino says.
Tableau Software Inc. (DATA) provides business analytics and software products. Tableau is a "next-generation" big data player with shares that, according to Wahlstrom, are trading in 3-star territory on the company's rating scale, meaning DATA stock should offer a fair return. Morningstar rates "fair value" at $90 for Tableau Software.
Watch for mergers and acquisitions. The hot nature of these companies leaves the sector ripe for mergers and acquisitions. Any of the smaller players can get taken off the board by a tech giant like IBM at any time, Kramer says. "One of my favorite picks in the space was actually Yodlee (YDLE), which harvested consumer financial data in a format that banks and hedge funds could interpret for their own sales or trading purposes. Yodlee got taken out for roughly a 50 percent premium. Build a portfolio out of likely acquisition targets, and you might end up with shares of the ultimate winners after all," Kramer says.