How Do You Cash in on the Big Data Revolution?
Paul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everybody is talking these days about "big data." From 1986 to 2007, humanity was able to store 250 optimally compressed exabytes and general-purpose computing power grew at annual rate of 58% (Science). Every two days, as much data is generated as in all of human history up until 2003 (IBM). However, as any intelligent investor knows there is a difference between information and knowledge. As a result, several companies have entered into the business of collecting this information and the analysis of it and/or creating to tools to enable its analysis and then selling them.
A survivor forges on
Many of you investors are probably familiar with the financial analysis products that FactSet (NYSE: FDS) produces, but have you considered it as an investment? Its current financials are impressive. First, 2012 was the 32nd consecutive year of revenue growth, including the last 16 years as a public company. These 16 years span both the dot-com boom and the Great Recession. Only three U.S. companies have done this. Its market capitalization is $4 billion, and it has over $800 million in annual subscription revenue, and it has a 92% retention rate. This was accomplished with no outstanding debt. Furthermore, its revenues were up 11% in 2012 and earnings up by 14%. Its free cash ratio was up by 19% (Annual Report). It's P/E ratio is slightly high at 22.56, and its dividend yield is 1.4% (Yahoo Finance). These are sightly worse than the market as a whole, but given its other financials they are both reasonable.
That is just what it has done in the past, and past success is by no means guarantee of future success. However, its record of succeeding in the face of past change does imply that it can weather, and even profit from, the various storms it confronts going forward. Furthermore, it sells information and information analysis. With the rise of big data, we are getting better at analyzing data, and firms across the board are realizing the value of gaining access to those resources. FactSet is ideally positioned to take gains in that revolution. It already has an established position in the database market. It still is small enough to innovate as the market adapts, but it is large enough to have established connections and the knowledge to gain more.
Furthermore, FactSet is primarily a provider of financials services. As the economy recovers and that market picks up, the demand for its resources will grow. Even if it not able to take advantage of the Big Data revolution, it should still be able to justify its stock price. Furthermore, because of its established client base and high retention rate, it should be able to maintain profitability for a long time to come. In other words, FactSet may grow extraordinarily fast, but likely will not shrink.
Splunk (NASDAQ: SPLK) is one of the leading companies in the big data space. The biggest problem here is it is not yet profitable. Now, it is a new company, and so in that sense, not making a profit is less worrisome. Its gross profits and revenues are both increasing quite a bit, which is a good sign. Its gross profits rose from about 30 million to about 50 million (Splunk). It and FactSet have very similar market caps, but even Splunk's revenues are quite a bit lower. Furthermore, no matter how one swings it, Splunk is far riskier. It might still be a good investment, but it's certainly more dangerous.
Thomson Reuters (NYSE: TRI) is perhaps FactSet's most direct competitor. It also provides financial data analysis. Thomson Reuters is a conglomerate though and has a market cap about seven times as large as FactSet's. Its P/E is lower though at about 15.06 (Yahoo Finance). Its earnings and free cash flow have been increasing, and it turned profitable in 2012. However, its sheer size does create problems for its adaptation to the rise of data, big and small.
Reed Elsevier (NYSE: RUK) and (NYSE: ENL) is a conglomerate similar to Thomson Reuters in that it has a branch that competes with FactSet. Its financials are also solid with its revenue growth up by 4% and its operating profit up by 6%. Its return on invested capital was 11.9%, which was solid but not amazing. It has the same problem as Thomson Reuters in that its sheer size can cause problems adapting. It also is more heavily invested in the academic journal industry, which is rather stable. As a result, its potential drop in revenue is likely much smaller. In comparison with FactSet, it is likely generally less volatile simply because of its diversification.
When we look at the bottom line, FactSet provides low potential downside, but a substantial upside, and a history of strong financial growth. It is positioned well to take advantage of the growth in data. Splunk also has a large upside, but its downside is also quite large. Thomson Reuters and Elsevier are both conglomerates with a major sector that competes with FactSet. They both may grow quite a bit and are doing reasonably well given their price, but their upside is not as strong as that of FactSet's.
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Paul Sangrey has no position in any stocks mentioned. The Motley Fool recommends FactSet Research Systems. 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!