Big Data Will Lead to Big Profits

By Spencer Knight - August 12, 2012 | Tickers: EMC, FB, FIO, NTAP, CRM, VMW | 0 Comments

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Over the past several years the "Big Data" revolution has been boiling, but the true financial potential has yet to be released. Big data, and subsequently cloud storage, is simply the process of storing large data sets in and on an easily accessible source so that one can retrieve and organize that particular data. One of the simplest examples of this is your email or any social media outlet. The key is that you can access this data from anywhere in the world as long as you know the username and password.

It is important to note that storing large data sets is not a novel idea. For decades companies have been exploring new ways to store data securely and in an easily accessible manner. In the old days this was done by connecting cords from computer to computer across countries and oceans. Now with the help of virtualization and cloud computing we live in a world that does not need cords. This idea of living in a cordless world and the fact that social media sites are cropping up left and right makes big data and cloud computing stocks very important for your portfolio.

A fusion between big data and big returns

After the close of the regular trading session on Thursday, Fusion-IO (NYSE: FIO) beat analyst’s revenue and income expectations by 10% and 44% respectively. More importantly, Fusion’s operating cash flows and current inventory positions improved 251% and 64%, respectively on a year over year basis. Furthermore, offered a forecast of 45%-50% revenue growth in 2013. The increase in inventory indicates that Fusion-IO is expecting to see greater demand for their products and therefore they have added to their inventory positions to meet this demand.

One of the biggest big data bellwethers is EMC (NYSE: EMC). After some relatively disappointing results and guidance the last few quarters, EMC bounced back by beating revenue estimates and missing EPS estimates by a mere penny per share. Similarly, EMC's child VMware (NYSE: VMW), also beat earnings estimates while simultaneously showing signs of becoming an entity of their own with the purchase of Nicira; which will negatively affect Cisco and may cause further problems with EMC and Cisco’s relationship.

The future is bright but the growth will be at a snail's pace

Even though big data, cloud storage, and virtualization are growing at impressive rates, we should not expect to see any of these stocks soar higher overnight. Sure, Fusion-IO popped 28% on Friday, but the stock was down almost 50% since the November high (prior to the earnings pop). On the other hand, EMC’s stock has trended higher over the past decade and this trend will continue over the next decade. Investors that pick up shares of EMC during correction periods will be rewarded over the long term.

The key point to note is that, while EMC's stock price is up about 190% since the 2008 low, the share price will be much steadier going forward. This is why investors need to take advantage of any pullbacks the market throws your direction. In fact, EMC has an incredibly strong ceiling at $30 right now. The stock approached this level once in 2011 and touched $30 in 2012. Both times ended the same; with a sharp collapse in the share price. I expect these same trends to grip the major big data players.

Don't fret the doom and gloomers

It is natural for the doomers and gloomers to attack big data companies citing that data storage is more of a service as opposed to a highly profitable machine. To be honest, there is some truth to that statement. For instance, Salesforce.com's (NYSE: CRM) most recent yearly profit margins are -.5%, 3.9%, 6.2%, and 4%. Fusion-IO has not fared much better the past two years with margins of -1.6% and 2.3% and NetApp's (NASDAQ: NTAP) margins failed to impress during the firms fiscal 2012 as well. This leaves EMC as one of the best big data and cloud performers. After the first half of 2012, EMC's profit margin is down slightly to 11.9% from 12.3% in 2011.

Another hitch in the doom and gloomers plans is the fact that the major big data and cloud storage companies have been increasing revenue at least on a year over year basis but also almost sequentially every quarter as well. This indicates that the economy is improving and businesses are willing to update and purchase new storage systems as opposed to using older systems.

Clouds are building in the storage sky

The key here is that the big data industry will be very profitable over the next decade and beyond. We will see the major players continue to either buyout smaller competition with new technology or adapt and continue to provide great products. Also, big data will be driven by an endless supply of social media outlets because these businesses will need to find a way to store that data so that their users can retrieve their information quickly and securely.

However, it is important to keep in mind that this industry is becoming a mine field for lower prices that will inevitably put downward pressure on margins. For instance Microsoft, Amazon, and Google cut prices for their cloud computing businesses earlier this year. While these may not be exactly the same services offered by the likes of EMC and Fusion-IO, the premise that future competition will hinder big data prices remains intact. The counter balance to this will be greater demand over the next decade. Therefore we should expect to see a balance between higher revenue and lower margins for big data and cloud computing companies.

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