26 August, 2013
Dear Buzzhairs Buzzhairs,
I wrote on Friday about my growing enthusiasm for technology stocks. I've been reading David Thornton in Penny Sleuth recently. He has talked about a number of very exciting tech stories that piqued my interest. None more so than the stuff on Big Data. Everyone seems to be talking about Big Data at the moment. But I must say I didn't fully grasp what it was about until I read David's article. So I thought I'd send it over to you. Enjoy…
Bengt
Big data and the vast potential for returns
Two policemen stand in a remote car park. It is 11.07 on a Friday morning and the sun is baking the roofs of twenty cars. The police stand and wait. They are taking part in a strange experiment that could revolutionise the way we treat crime. This experiment doesn't rely on casework or instincts that these officers have developed after years of patrolling the neighbourhood. It was a computer that told them to come here.
This computer, which has analysed 13 million crimes over the course of 80 years in this city, has predicted that there is a very high chance of a burglary at this specific point, on this Friday morning. So they stand and wait.
Then they see them – two hooded heads bobbing up and down and peering through the windows of cars. When they get closer they see that the hoodies belong to two women. And when they take them into custody they discover that one woman had outstanding warrants, while the other was carrying a considerable amount of drugs.
I've been following experiments like this for some time. And there is a fascinating story here about how we can use vast resources of data to better understand the way we can spot and control crime across cities. The results so far are nothing short of staggering.
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Burglaries down 27% in one month!
This particular arrest is part of an experiment by the Santa Cruz Police Department. They have been working with the University of California to analyse patterns of crime across LA for the last few years. And when they stood back and looked at the data – all 13 million crimes – the scientists found some very interesting patterns.
One of the most striking patterns resembled the clustering patterns of aftershocks in the wake of an earthquake. They realised that when a crime occurs, there is a very elevated risk of crimes in the neighbourhood that surround it. And once you identified these high-risk zones over the course of the day, police could be sent out to patrol them. Cue our two patient policemen at the start.
Now this was just one pattern that the scientists at the University of California identified. But the early indications are enormously promising (and exciting for investors!). Burglaries were down 27% in the first month compared the year before. And this experiment is now being trialled across 150 cities in America.
It's coming to Britain too. In fact this is just one example of what we call Big Data – the use of vast resources of data to understand and take control of society. From crime to blackouts, heart attacks and the spread of disease, we are using Big Data to address problems that we've never been able to control before. And it has to be one of the most exciting investment stories I've seen for some years.
90% of all data was produced in the last two years
You are going to hear a lot about "Big Data" over the coming year. And in Penny Sleuth and Red Hot Penny Shares, I'd like to show you the many ways you could profit from this story.
Like nearly all major developments in technology, the story starts with Moore's Law. Way back in 1965, Intel co-founder Gordon Moore forecast that computing power would double every two years and that this trend should continue for at least 10 years. As long term forecasts in the field of technology go, this proved to be extremely accurate and even more durable than Moore expected in that the relationship still holds good almost half a century on.
As well as making computers ever more affordable (providing you with more computing power in your mobile phone than the Apollo 11 astronauts had onboard their lunar lander), this explosion in our capacity to crunch numbers has resulted in a staggering increase in the amount of data being created and stored. Mind-bogglingly, 90% of all the data in the world was produced in the last two years alone.
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How I discovered this story
I first realised the disruptive influence of Big Data about ten years ago. At the time my wife was working on the decoding of the human genome project where she reported to the Director of "Bioinformatics". This was a new word which captured the interplay of information technology and biology. In fact sequencing the genome was as much about IT as it was about biochemistry. It had been a decade long marathon that mapped out the sequence of more than 3 billion chemical building blocks that make up Human DNA. In order to address that kind of problem we had to develop supercomputers that were capable of dealing with that much information.
That took time. But today processing power has advanced to the point where the Human Genome could be sequenced in a day. In fact as my friends in the scientific community around Oxford will tell you, we are able to glean some remarkable insights into body through Big Data.
Take the EuResist project, which is being run by IBM and backed by the European Commission. This project has gathered information from 50,000 HIV patients, including demographics, viral loads, white blood cell counts, treatment history and the genetic data both of the HIV viruses and the individual patients. Using esoteric mathematical concepts, IBM has built prediction engines that determine the best combination of drugs for any given patient. This engine predicts the correct outcome in 75% of cases. When tested against 25 actual cases that were not in its database, EuResist beat nine out of ten international experts in predicting how well the treatments had performed.
Big Data steps in where a conventional database system's processing power and analytical approach is inadequate. When it comes to medicine, this promises to radically improve the way we develop drugs and understand disease. I'll talk a lot more about this "bioinformatics" boom and how you can profit in coming weeks. But I want to stress today that this is not a story that will take years to play out. It's already producing very serious penny share opportunities for investors.
A $47.8bn market by 2017
Let's start with who is profiting from Big Data now. A familiar example from the commercial world is the use Amazon and Walmart makes of the shopping data it collects. Amazon not only logs what you have bought but also what you have been browsing, what you have put in a wish-list, what millions of other customers have been buying with similar habits to you and so on. This allows them to generate targeted emails and offers, most of which will be relevant and timely - certainly when compared with the junk mail and coupons stuffed through your letterbox. This well informed, smart marketing clearly benefits both retailer and consumer.
Some other obvious beneficiaries are IT behemoths like Oracle or IBM who have an advertising campaign currently focusing on Big Data and how they can help companies harness the information they hold. Within a company the size of IBM however, Big Data revenues are merely incremental - at an estimated 1% of group revenues it can't make a big enough difference to them. We need to find smaller more focused stocks that can really benefit from this revolution. That's what I plan to show you over the coming weeks. Wikibon estimates the Big Data sector will grow 33% pa between 2012 and 2017, from $11.4bn to $47.8bn – it's a big opportunity in every sense.
One UK company that is focused entirely on Big Data is Sheffield based WANdisco (WAND). Headquartered in Sheffield, whilst the management and key IT developers are based in California. David Richards, Chairman and CEO, founded the company in 2005 and expects it to achieve $1bn in sales in the fullness of time. WANdisco's expertise is in Hadoop, which is the main Big Data open-source platform used by Yahoo, Facebook, Linkedin and the like.
In April it announced its first Big Data contract (with a top tier global telecom company). This came on top of first quarter revenue growth of almost 100% and complements a client list of technology blue chips (including Apple, Cisco, Emerson, Fujitsu).
Growth should be rapid and the company is investing heavily in product development, an expanded sales team and software engineers as it grabs territory in this fast growing market. This investment will hold back short term profits but if CEO Richard's predictions are correct the stock will be an exciting ride. One to watch and I'll tell you more about my favourite Big Data stocks in the week ahead.
David Thornton
PS: Got a comment on this article? Leave a comment on the MoneyWeek website, here.
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