Intro To Big Data Companies: Big Returns, Big Risks [General …

One of the hottest areas of information technology right now is the field of “Big Data”, and closely related “Business Intelligence”. While these concepts don’t get anywhere near as much discussion as some other emerging industries, say 3D Printing (see my article on 3D Printing stocks here) or Medical Marijuana (See my article here), Big Data and Business Intelligence are still extremely important emerging industries that offer significant opportunities for informed investors over the next few years.

This article continues my series of articles on emerging industries and the companies that are poised to benefit from those industries. Now, of course, there is no way for a single article to cover comprehensively an entire industry and all the firms operating in it, so I will focus on giving an overview of Big Data in this article and which key companies seem best poised to benefit going forward.

Big Data as an industry basically involves selling hardware, software, or services that enable other client businesses to gather, organize, process, and draw conclusions around very large amounts of some measured characteristic that the client business cares about.

An example of a big data application would include customer demographic information gathered from a supermarket’s loyalty card program and combined with sales data for those customers. The client company, in this case a supermarket, would buy servers and software to record and analyze the millions of transactions they have every day alongside the data on the customers that the supermarket company has from loyalty cards. Using even basic loyalty card information like a customer’s zip code, the supermarket company (or an outside consulting firm they hire) could use third party databases to determine estimates of income, family size, and behavioral data for all of their customers. Using this information, the supermarket company could, among other things, offer its customers targeted coupons in an effort to increase sales.

This example is just the tip of the proverbial iceberg with Big Data though. Literally any decision that a company must make can potentially be improved by using Big Data assuming that the data in question is available and can be analyzed. Everything from which employees are the most productive to which patients in a hospital are the most likely to contract an infection can be forecast using Big Data.

Now, of course, the quality of the forecasts or decisions made based on the data gathered are only as good as the data itself and the person analyzing the data, but nonetheless, the potential uses for Big Data are significant enough that most major companies are looking at ways to use the new technology. Consulting firm McKinsey sees Big Data as a foundation technology for some of the biggest innovation trends coming down the pipeline in the future, and believes the technology will be critical to the US economy in the future. The NY Times suggested a similar point in a recent piece.

With that basic overview in mind, it should not be surprising when I say that many different companies are pursuing the Big Data area with a vengeance. Heading the list are technology behemoths IBM (IBM), EMC (EMC), Oracle (ORCL), Hewlett-Packard (HPQ), and Microsoft (MSFT). IBM and HP are both big competitors in the hardware field offering servers that are designed to help firms with data analysis. IBM is one of the leaders in the area with cutting edge research projects like its famous Jeopardy playing-computer Watson using Big Data based technology. IBM has been promoting its Power servers as an affordable option for firms looking to start doing data collection and analysis. These IBM servers compete against other servers from the likes of HP which run on Intel (INTC) chips and are less versatile than IBM’s machines, but arguably are more standard for use with Hadoop applications.

IBM spans both the hardware, software and services markets though, Big Blue also is a formidable competitor of Oracle in this space. Oracle for its part has a hardware business also, but its primary focus is on software to power Big Data applications, particularly databases. Oracle’s efforts have been hindered by the company’s relatively slow roll-out of cloud based services, but the firm now looks better prepared to compete in the Big Data software space going forward, particularly given the firm’s recently announced alliance with Salesforce (CRM). This alliance should help improve the competitiveness of both CRM and ORCL’s offerings going forward. This is particularly important as the competition in the space is heating up rapidly. Currently, Oracle and German firm SAP are leading the competition in Big Data software market share, but this could easily change going forward as the overall Big Data market continues to grow by high single or low double digits each year.

While Oracle and IBM both have established positions in Big Data, EMC may be the best positioned big company to benefit from Big Data. From the firm’s new joint venture called Pivotal with VMware (VMW) to EMC’s buyout of up and coming competitor ScaleIO, no company has been more focused on the potential of Big Data than EMC.

In concert with VMware, EMC’s new Pivotal initiative will focus on developing new and important applications that build on the data created by businesses. In particular, the idea is to create software products that will do things like monitor data gathered by sensors on jet engines, or look for ways to improve hospital management based on sensors in hospital rooms and on machines. This initiative is important enough that EMC and VMW are turning it into an entirely separate company which could eventually be spun off or partially spun off in the same way that VMware developed out of EMC originally. The Pivotal project also got a big boost after massive industrial conglomerate GE (GE) put $100 million in capital into the project. This buy-in from GE should give Pivotal even more credibility with potential customers and help to ensure the project’s ultimate success. This initiative, combined with EMC’s traditional data storage business (which is benefiting enormously from the additional storage space needed to gather the data in Big Data), should end up making EMC a big winner off this technology in the medium term.

All of the firms I have talked about so far are major players in the Big Data space and they will benefit over time as the industry grows and spawns sub-industries, but none have the same degree of potential as a few smaller firms that are starting to attract “Big” attention. Tibco (TIBX), Splunk (SPLK), and Tableau (DATA) are all small companies that should be able to ride the Big Data wave to the big time, barring any major missteps.

Splunk produces software that is used to search, monitor, and analyze Big Data through a web interface. Unlike the tech giants I discussed above, Splunk’s whole business is Big Data which gives it significantly more exposure to corporate IT spending in the area. Despite its small relative size, the company has managed to get some significant corporate customers such as Goldman Sachs, CVS, and Expedia among others. Unfortunately, unlike the tech giants above, all of which generally trade at reasonable P/E ratios anywhere from 10-20, Splunk does not make any money currently.

Now my goal in this article is not to examine Splunk’s financials or the financials of any of the other firms, but obviously if Splunk isn’t making any money right now, then it is a much riskier investment. Despite this risk, Splunk has performed well since its IPO largely on the back of rapid revenue growth. Thus the company is growth stock and investors in it need to hope it either eventually becomes a future Salesforce or Amazon, or is bought out like tech peer ExactTarget (ET) recently was. Either way, Splunk will be doing everything it can to grow its revenues by double digits for the foreseeable future through its software package. The main selling point in Splunk’s software is that it is easy for customers to use in comparison with competitors’ products or with Hadoop or other programming languages.

In a similar fashion to Splunk, Tableau produces software to enable customers to analyze and make decisions based on Big Data. The company is tiny by the standards of the tech giants, but it is growing rapidly having produced revenues of $34.2 million in 2010, $62.4 million in 2011, and $127.7 million in 2012. The company’s profits on this revenue are fairly negligible ($1.6 million in 2012, for example), but the revenue growth seems to have impressed investors as the firm had a very successful IPO roughly a month ago. Like Splunk though, Tableau is a risky small company which also correspondingly has more potential reward if the company’s growth continues going forward.

Finally, Tibco is a mix between firms like Splunk and EMC. While TIBX is a relatively small company, the firm has been offering software and services related to data analysis since the mid-1980’s and the company has been publicly traded and profitable for years now. Tibco offers both on-premise and cloud based software, and its growth while not as strong as Splunk and Tableau has nevertheless been impressive and fairly consistent over the last five years. For this reason, I see Tibco as the strongest of the small pure-play big data companies, with considerable potential for earnings growth as the Big Data market grows going forward. (See my recent detailed article on Tibco here for more details.)

In summary, investors looking for a stable and safe way to play the Big Data trend should look to EMC for the greatest upside and exposure to this business, or baring that to either IBM or Oracle, both of which have enormous market share in the space. Based on their market share, and size of other revenues, HPQ and MSFT are unlikely to see quite as much benefit from Big Data as these three. For those investors looking for riskier, more focused Big Data plays, Tibco is my personal choice, though both Splunk and Tableau are also seeing rapid growth and should do well if Big Data develops as expected.

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Intro To Big Data Companies: Big Returns, Big Risks

Disclosure: I am long TIBX, EMC, IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)

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Intro To Big Data Companies: Big Returns, Big Risks [General …