In this commentary, we examine the rapidly growing sub-industry of Big Data and how long-term investors may position themselves to benefit. In doing so, we will highlight two companies we believe are poised to significantly benefit from this explosive growth.
Big Data Basics
As data and storage needs increase in complexity and sheer magnitude, companies are challenged to maintain, store, and analyze this information in a more effective manner. Within the IT industry, this is challenge stems from what is known as Big Data. By Wikipedia definition, Big Data is a term applied to data sets whose size is beyond the ability of commonly used software tools to capture, manage, and process the data within a tolerable elapsed time.
Did you know that 90% of the data in the world today was created within the last two years?
Data is growing at an alarming rate, given the explosive rise of social networking and cloud computing in the last two years. Every day, 2.5 quintillion (1000^6) bytes of data are created. To put that number in perspective, that's 2,273,736.75 terabytes of data created each day.
Previous generation data storage technology (in some cases over 30 years old) simply cannot handle this demand, which is forcing direct investment of billions of dollars into new system overhauls. International Data Corporation forecasts the Big Data market growing from $3.2 billion in 2010 to $16.9 billion in 2015. This represents a compound annual growth rate (CAGR) of 40%, which is about seven times higher growth than the overall information and communication technology market.
Companies at the Center
These companies enable their customers more effectively utilize their data by offering a combination of products and services specifically for Big Data.
EMC Corporation (EMC)
Plain and simple, EMC is in the information infrastructure business; its storage products help make data scalable and more efficient as end user demand grows in the future. This is critical for Big Data users to leverage their information in a more valuable manner. Best of all, its products are compatible with many different platforms including IBM and Oracle (ORCL). Revenue has grown 10.4% on a 3-year annualized basis, while earnings per share were up 21.7% during the same period. Looking shorter term, year-over-year trends indicate revenue and EPS growth has accelerated from the 3-year average, with 17.6% growth in revenue and 25.5% EPS growth. Most recently, EMC booked its best fourth-quarter results in company history.
Teradata Corporation (TDC)
Teradata is a provider of enterprise data warehousing, including enterprise analytic technologies and services. TDC is uniquely positioned as a pure play data analytic company whose primary focus is analyzing data and turning it into actionable intelligence. Its suite of products and services represent a huge value for companies in the market to improve their operating efficiencies. As enterprises become increasingly overwhelmed with their exponential data growth, TDC has seen its share value outperform the S&P dramatically. With a current market capitalization in the neighborhood of $11.5 billion, TDC is by no means at the end of its cycle. Looking back fundamentally, 3-year revenue and EPS growth was up 10.3% and 13.9% respectively. On a year-over-year basis, those numbers have accelerated to 22% and 16.3% respectively. Perhaps on a short-term basis, it is trading at a rich valuation of 26.22 forward earnings, but it is very well positioned for long-term growth.
Conclusion
We are currently living in the age of information, version 2.0; the companies that realize the high value of information and invest now are likely to maintain their competitive edge in the future.
While the two companies highlighted are certainly not the only ones competing for the billions of dollars being invested into Big Data, we have identified them as the best of breed pure plays on the trend. Other big name competitors in Big Data include IBM, Oracle, and Hewlett Packard (HPQ). The problem for shareholders of the competition is that this trend may not be enough of a tail ($16.9B) to wag the dog because they are too large and diversified for it to matter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
