According to an International Data Corporation (IDC) report, the big data market is expected to grow at a compounded annual growth rate of around 40% in the next two years. With such a massive growth rate, this market has the potential to reach about $17 billion by 2015. In this article, I have tried to find companies that are rightly positioned to capture the growing big data market and that can capitalize on its benefits. I have narrowed down my search to three companies: Amazon (AMZN), IBM (IBM), and Hewlett-Packard (HP). Their long-term fundamentals seem intact enough to handle the explosive growth that is expected from big data.
With the introduction of Amazon Redshift, a cloud-based service in its Amazon Web Services (AWS) segment, the company has strengthened its position in the big data space. The beta version of the cloud-based data warehousing service was introduced in November 2012, and this traditional enterprise data warehouse alternative is now available in the eastern region of the U.S. The main advantage of this product over its competitors lies in its low cost and its compatibility with other intelligence tools. The services cost as low as $1,000/terabyte per year -- only 10% of what traditional warehouses charge. Moreover, recently Amazon reduced the prices of its AWS service for the 27th time since its inception. This indicates that the company can still further reduce the price of the service in the future, which should attract organizations looking for cost-cutting initiatives.
Additionally, the company has entered into a deal worth $600 million to provide a cloud-based service for the next 10 years to the CIA. The company will assist the agency in developing an infrastructure to keep up with innovative technologies, such as big data analytics. With the help of this deal, the company can persuade other government agencies to also avail themselves of the services provided by AWS. Currently, the AWS segment contributes about $2 billion annually, but with advanced and low-cost services like these I feel as if this segment can more than double its turnover in the next two years. Hence, AWS could be a key driver for the future growth of this stock.
At the end of February 2013, IBM conducted its annual investors' meeting and discussed its future growth drivers. The expected growth in EPS because of its top line is around $3.05 by 2015. The company also focused on four initiatives that are expected to deliver about $20 billion acceleration in its revenue growth by 2015. The most important of these initiatives is business analytics, which includes big data analysis.
Adapting to the increasing demand of big data analytics in the world, the company has revised the expected revenue from such services to about $10 billion in the next two years. This represents a 14% annual growth rate in the big data analytics service. It is expected that the data should ramp up with the addition of social media, sensors and devices, VoIP, enterprise data, etc. in the coming future. About 80% of the same could be unstructured. Thus, the analytics required to sort the meaningful information from that vast amount of data should expand the company's revenue base. IBM's latest initiative of using big data to solve the water crises in South Africa is a good example of what this analysis is capable of, and shows the opportunity for IBM in the future.
Apart from this, the company is also on track to achieve its targeted enterprise productivity savings of $8 billion by 2015. The savings should be driven by a combination of costs and expense reductions and revenue productivity measures, such as using shared services, end-to-end process transformation, and integrated operations. About 60% of the saved amount will be reinvested in the services like Smarter Planet, business analytics, the cloud, or for acquisitions.
This PC giant has been facing headwinds from its low-margin and weak PC and printer segments. To mitigate the overall exertion on the profitability, investors' revenue growth expectations are shifting to other investments such as Autonomy and Vertica. Both of these investments should help HP face the big data analytics market. Vertica offers a solution optimized for both structured and unstructured data. The current data warehouse provides a good query performance for structured data. But Vertica can add semi and unstructured data such as log data, communications, and weather data to that. For Autonomy, the company is planning to combine it with the ArcSight to provide security against cyber attacks and identify dishonest employee behavior to its clients. However, about 90% of book value of this investment was written down by the company pertaining to financial fraud in relation to the subsidiary.
Additionally, the company recently introduced its new analytics called the Big Data Discovery Experience. The use of this service does not require any capex investment from the client. It helps the user to mitigate risk, improve efficiency, find new frontiers for investments, etc. The service is currently available in America and some countries in the European region.
On a different note, the restructuring plan of the company seems to be moving in the right direction. By the end of 2014, labor savings are expected to be about $2.2 billion and non-labor savings to be around $1.1 billion. In terms of labor savings, the company should reduce the headcount by approximately 26,000. Non-labor restructuring initiatives include SKU reductions (particularly in PC and printer segments), supply chain rationalization, etc. However, the drag of larger segments is much more than the above upsides. The restructuring and big data analytics should provide some tailwinds, but I remain neutral on this stock.
The exabyte of data to analysis should bring tons of opportunities for these companies to grow. After reviewing the three stocks, I feel that all of them are well-prepared to capture a significant part of the growing market.
Amazon with its Redshift, Hewlett-Packard with its Big Data Discovery Experience, and IBM's initiative in South Africa are clear examples of how these companies are preparing to tackle the tsunami of big data in the future. I am bullish about all three with respect to big data analysis, but the heavy drag of other segments for Hewlett-Packard, such as PCs and printers, makes me neutral on the stock.