How to buy big data

Financial journalist
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Big data refers to the massive stores of data generated by companies from their operations, and the difficulty of organising it and “mining” it for insights. Big data is well beyond the capabilities of standard database software to handle, so specialised services to capture, sift and analyse it, using smart algorithms and high-speed technology, are coming to the market. These services handle both the amount of data (volume) and the speed with which it arrives (velocity), which most businesses generating the data cannot.

The movement

Any company that collects data from its customers will benefit from big data applications – that means any company with a database, from utilities to banks to retailers to airlines.

For example, last year, Woolworths spent $20 million buying a 50% non-controlling stake in data analytics company Quantium, to get access to its data, analytical, media and software services to boost its existing customer analytics capabilities. The strategy is that Woollies will drive growth at the retailer by using customer insights to tailor its product range and come up with more effective promotions and marketing programs; and automate and fine-tune its inventory levels based on current demand. The retail giant is particularly interested in using big data to improve its online sales and at some stage may use it to enter other markets.

In turn, Quantium taps Woolworths’ customer data (stripped of identification) gleaned from its Everyday Rewards customer loyalty cards, credit and debit cards, to improve services to a range of clients including eBay, IAG, Telstra, Suncorp and Qantas.

Qantas uses big data to tailor its in-flight services and again there are opportunities in other markets here too. Banks are using big data to enhance customer relationships and analyse customer risk, through quicker and more thorough assessment of cash flow.

Analysts says CBA is furthest down the big data track, as it seeks to glean what it can from its 5 million online customers and 2.6 million people who use its apps. The bank’s new Albert point-of-sale payments device is designed to create a new platform for merchant-customer interaction: CBA will collect the data.

CBA sells a big data analytics tool, known as Daily IQ, to its business customers. Launched in March as an iPad app, it provides cashflow reporting, and business insights from similar industries in comparable locations, to give businesses an idea of their true performance.

The investment opportunities

To invest in companies that directly benefit from big data, we have to look further afield.

Data centre operator NEXT DC Limited (NXT) is one candidate. NEXT DC operates five purpose-built data centres, in Melbourne, Brisbane, Sydney, Perth and Canberra, to host critical IT infrastructure – such as servers – for its customers, and offer Data-Centre-as-a-Service (DCaaS) services. With the exponential growth in data creation and usage and the associated storage needs that implies, NEXT DC should be able to make money – but it does not at the moment. The company made an underlying net loss after tax of $16 million in FY14.

However, NEXT DC did something very interesting with three of its data centres: it rolled them into a special-purpose real estate investment trust (REIT), which owns the Melbourne, Sydney and Perth data centres, and leases them back to NEXT DC. The trust, APDC Group (AJD), does make a profit: it made a profit of $21.76 million in FY14 (including unrealised asset revaluations of $12 million), and paid 9 cents a share in distributions. At the share price of $1.115, AJD offers a historical yield of 8.1%, as a landlord for data storage centres.

Network operator Vocus Communications (VOC) and managed hosting and telecommunications company Macquarie Telecom (MAQ) also operate data centres, but not as their core business, unlike NEXT DC. Macquarie Telecom made a loss in FY14 but Vocus earned $13.6 million, up 53%.

Other stocks that could benefit from big data are the IT consultants: SMS Management & Technology (SMX), UXC (UXC), the soon-to-disappear Oakton (OKN) – it is being taken over by Dimension Data – and Data#3 (DTL). SMS Management & Technology, for example, says it “devises strategies that leverage the dimensions of Big Data to maximise business value from this fast-moving asset.” UXC says it is also working to leverage the potential of the data generated by interconnected Internet-enabled machines (where Big Data meets the “Internet of Things.) “

Companies like this are at the forefront of applying Big Data: the problem for the investor is that Big Data work is not broken out separately, and it is hard to see the proportion of the work coming from it. But the more companies that look to use Big Data, the more work there will be for the consultants who understand it best.

Of the consultants, UXC is trading at current price on a fully franked prospective FY15 yield of 5.6%, SMS Management & Technology is on 3.7% and Data#3 on 6%.

Offshore opportunities

For a pure data play, you might be better off looking offshore. If we were US investors, investing in “Big Data” – something that fund manager Fidelity Investments refers to it as an “industrial revolution” – would be a breeze.

But Australian investors can still buy US companies like General Electric, IBM, Oracle, Microsoft, SAP and Symantec, all of which have invested heavily in global data centres designed to interpret big data. There are also the chip stocks like Intel, Micron, Freescale, Xilinx and SanDisk, or networking giant Cisco Systems, all of which are plays on big data.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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