Big data is a trend that I’ve followed for some time now, and even though it’s still in its early stages, I expect it to continue to be a game changer as we move further into the future.
As our Internet footprint has grown, all the data we create — from credit cards to passwords and pictures uploaded on Instagram — has to be managed somehow.
This data is too vast to be entered into traditional relational databases, so more powerful tools are needed for companies to utilize the information to analyze customers’ behavior and predict what they may do in the future.
Big data makes it all possible, and as a result is one of the dominant themes for technology growth investing. We’ve invested in several of these types of companies in my GameChangers service over the years, one of which we’ll talk more about in just a moment.
First, let’s start with two of the biggest and best big data names out there. They’re among the best pure plays, and while I’m not sure the time is quite right to invest in either right now, they are both garnering some buzz in the tech world.
Big Data Stocks: Splunk (SPLK)
The first is Splunk (SPLK). Splunk’s flagship product is Splunk Enterprise, which at its core is a proprietary machine data engine that enables dynamic creation on the fly. Users can then run queries on data without having to understand the structure of the information prior to collection and indexing.
Faster, streamlined processes mean more efficient (and more profitable) businesses.
While Splunk is very small in terms of revenues, with January 2015 fiscal year sales of just $451 million, it is growing rapidly, and I’m keeping an eye on the name as it may present a strong opportunity down the road.
However, I do not want to overpay for it. Splunk brings effective technology to the table that is gaining market acceptance, and has strong security software partners with its recent entry into security analytics. At the right price, the stock could also be a takeover candidate for a larger IT company looking to enhance its Big Data presence.
Big Data Stocks: Tableau Software (DATA)
Another name on my radar is Tableau Software (DATA), which performs similar functions as Splunk’s. Its primary product, VizQL, translates drag-and-drop actions into data queries. In this way, the company puts data directly in the hands of decision makers, without first having to go through technical specialists.
In fact, the company believes all employees, no matter what their rank in the company, can use their product, leading to the democratization of data.
DATA is also growing rapidly, even faster than Splunk. Revenues were up 78% in 2014, and 75% in the first quarter of 2015, including license revenue growth of more than 70%. That rate is expected to slow somewhat, with revenues for all of 2015 estimated to increase to a still strong 50%.
Tableau stock is also very expensive, trading at 12X expected 2015 revenues of $618 million and close to 300X projected EPS of 40 cents for the year. DATA is a little risky to buy at current levels, but it is a name to keep an eye on in any pullback.
Big Data Stocks: Red Hat (RHT)
The company we made money on earlier this year in my GameChangers service is Red Hat (RHT). We booked a 15% profit in just a few months after it popped 11% on fourth-quarter earnings.
Red Hat is the world’s largest leading provider of open-source solutions, providing software to 90% of Fortune 500 companies. Some of RHT’s customers include well-known names like Sprint (S), Adobe Systems (ADBE) and Cigna Corporation (CI).
Management’s goal is to become the undisputed leader of enterprise cloud computing, and it sees its popular Linux operating system as a way to the top. If RHT is successful — as I expect it will be — Red Hat should have a lengthy period of expanded growth as corporations increasingly move into the cloud.
Red Hat’s operating results had always clearly demonstrated that its solutions are gaining greater acceptance in IT departments, as revenues had more doubled in the five years between 2009 and 2014 from $748 million to $1.53 billion. I had expected to see the strong sales growth continue throughout 2015, and it did. As I mentioned, impressive fiscal fourth-quarter results sent the shares 11% higher.
I recommended my subscribers sell their stake in the company at the end of March because I believed any further near-term upside was limited. Since then, shares have traded mostly between $75 and $80. It is now at the very top of that range and may be on the verge of breaking above it after the company reported fiscal first-quarter results last night.
Although orders were a little slow, RHT beat estimates on both the top and bottom lines in the first quarter. Earnings of 44 cents per share were up 29% quarter-over-quarter, besting estimates on the Street for earnings of 41 cents. Revenue climbed 14% to $481 million, while analysts had been expecting $472.6 million.
At this point, RHT is now back in uncharted territory, climbing to a new 52-week high earlier today. This is a company with plenty of growth opportunities ahead, and while growth may slow a bit in the near term following the stock’s impressive climb so far this year, RHT stands to gain as corporation continue to adopt additional cloud technologies.