Big Data: Why Warren Buffett Owns 5.4% of IBM

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Big data refers to the volume of digital data being collected around the world. Every day, nearly 2.5 quintillion bytes of data are created. This data comes from everywhere: sensors used to gather climate information, posts to social media sites, digital pictures and videos, purchase transaction records, and cell phone GPS signals to name a few.

Lots of companies are making big data their top priority for 2012 and beyond. Venture capitalists are also pouring huge money in tech start-ups trying to get an early edge on this emerging trend. With International Business Machines (NYSE: IBM) being on the forefront, Warren Buffett made the company one of his three largest stock positions. Mr. Buffett invested $10.7 billion into IBM. His Berkshire Hathaway fund has taken a 5.4% stake in the company.

Why Big Data

Companies are now trying to analyze big data using algorithms to predict future behavior patterns of consumers. Revenues could significantly rise if it’s possible to accurately predict future spending patterns of consumers analyzing the data. McKinsey Global Institute (MGI) recently published a research report on how big data could help companies in generating value by increasing operating margin and reducing expenditure.

MGI studied big data in five domains -- healthcare in the United States, the public sector in Europe, retail in the United States, and manufacturing and personal-location data globally. Big data can generate value in each. For example, a retailer using big data could increase its operating margin by more than 60 percent. Harnessing big data in the public sector has enormous potential too. If US healthcare were to use big data creatively and effectively to drive efficiency and quality, the sector could create more than $300 billion in value every year. Two-thirds of that would be in the form of reducing US healthcare expenditure by about 8 percent. In the developed economies of Europe, government administrators could save more than €100 billion ($149 billion) in operational efficiency improvements alone by using big data, not including using big data to reduce fraud and errors and boost the collection of tax revenues. And users of services enabled by personal-location data could capture $600 billion in consumer surplus. 

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Investing in Big Data: Why IBM

Big data = Big Return on Investment (ROI)

While there is a lot of buzz about big data in the market, it isn’t hype. Plenty of customers are seeing tangible ROI using IBM solutions to address their big data challenges. IBM is unique in having developed an enterprise class big data platform that allows customers to address the full spectrum of big data business challenges.

The real problem with big data is that it doesn’t fit neatly into relational databases. That makes it more difficult for organizations to locate and leverage data effectively and efficiently. To address these new realities and requirements, IBM has committed to spend $100 million to research technologies and services that will enable clients to manage and exploit data as it continues to grow in diversity, speed and volume.

Mr. Buffett's actions are closely monitored by other investors because of his track record for spotting and buying undervalued stocks. "He is looking for a business that will have double digit bottom line growth and will be reasonably stable in good times and bad," Louis Miscioscia, managing director at financial advisors Collins Stewart, told the BBC. "That is what IBM shares offer, bearing in mind their software and services business is very consistent."

Other Options

Other large players in the big data trend like Teradata and Oracle can also be considered for investment. Facebook (NASDAQ: FB) is also talking big data. Facebook invited a handful of tech journalists to its Menlo Park campus in August for a briefing on how the world’s biggest social network uses data. Despite strong performances this year, I see the stocks mentioned above trading much higher over the long term as this trend grows stronger. I suggest buying these stocks on any pullbacks.

Anindya7 owns shares of IBM and Facebook. The Motley Fool owns shares of Facebook, International Business Machines, and Oracle and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, International Business Machines, and Teradata. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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