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Stocks to benefit from greater demand for big data

Vikram Barhat ()

The recent Facebook data breach scandal and the maelstrom of media coverage that ensued sparked a vigorous debate around manipulation of user data owned by companies and lax regulation around data privacy.

While much of the public discourse and concern is focused on its misuse, the voluminous amounts of structured and unstructured information, or big data, gleaned daily from our connected devices, can provide unique insights and meaningful patterns that can be exploited to make things better, faster and more efficient.

As artificial intelligence takes centre stage and its application expands to new areas of human existence, businesses across industries are seeking, storing and analyzing big data to sharpen and scale their AI capabilities and improve the outcomes. From healthcare to self-driving cars and from agriculture to business intelligence, much of the transformational change that AI is leading across industries is driven by pools of big data backing it.

Big data, regarded as a new natural resource of the digital age, is indeed reshaping the future of AI. For long-term investors, this represents a whole new way to play technology. Leading companies that are accumulating and analyzing massive quantities of data to help develop disruptive products and services are well positioned to benefit as the demand for big data grows exponentially.

 

Qualcomm Inc.
Ticker: QCOM
Current yield: 4.51%
Forward P/E: 14.6
Price: US$50.08
Fair value: US$75
Value: 33.2% discount
Data as of April 24, 2018

 Qualcomm ( QCOM ) develops wireless technology and designs chips for mobile phones. The firm's technology is licensed by virtually all wireless device makers. The world's largest wireless chip vendor is supplying many premier handset makers with highly advanced processors.

Part of Morningstar's high-quality stocks in the Exponential Technologies Moat Focus Index, Qualcomm has been betting big on AI and big data themes. The company has been pouring millions in Chinese start-ups through its China Venture Fund that invests in tech unicorns doing pioneering work in the fields of AI and big data analysis. Further, to capitalize on increasing consumer demand for cloud-based applications and data collection, the tech leader recently launched Qualcomm Centriq 2400, the world's first and only 10nm server processor for cloud applications.

"Qualcomm has strengthened its offerings at the flagship smartphone level while also branching off into new growth vectors including data centre, automotive and Internet of Things," says a Morningstar equity report.

The U.S. chipmaker recently raised its takeover bid for Netherlands-based NXP Semiconductors, the largest vendor of automotive semiconductors. The US$44 billion buyout of NXP will help the U.S. chipmaker diversify its customer base, as it seeks to shift its focus from a cooling smartphone market to the fast-growing automotive market.

"NXP Semiconductors acquisition will allow Qualcomm to leverage its chip design and connectivity expertise in the automotive and Internet of Things areas, and will "significantly diversify Qualcomm's revenue sources," says Morningstar equity analyst Abhinav Davuluri, who recently raised the stock's fair value from US$68 to US$75.

Despite facing headwinds in the smartphone chip market, Qualcomm's raft of 3G and 4G technology patents will allow "the firm to earn significant royalty fees over the next decade and likely beyond," says Davuluri.

 

International Business Machines Corp.
Ticker: IBM
Current yield: 4.11%
Forward P/E: 10.5
Price: US$146.88
Fair value: US$168
Value: 12.6% discount
Data as of April 24, 2018

A global IT giant,  IBM ( IBM ) offers a range of services, software and hardware through operations in 170 countries. The company generates a little more than half of its revenue outside the Americas.

"IBM is in the middle of yet another digital revolution, and while the jury is still out on the long-term strategic and financial success of initiatives like analytics and cloud computing, we think rising sales from these products will mostly offset slow declines in legacy businesses," says a Morningstar equity report.

Big Blue is seeking to create an extensive developer ecosystem built on top of Watson, an AI-enabled cognitive computing system -- a positive step forward for its enterprise application and big data and analytics businesses. Leveraging its leadership position in the predictive analytics market, IBM has tied up with Twitter to offer industry-first cloud data services that allow business professionals and developers to extract actionable business insights by uncovering hidden patterns and relationships by sifting through large clusters of social data.

"While early days, we think investments in IBM Cloud, establishment of development platforms like Watson Developer Cloud and enterprise application partnerships with leading global companies present positive opportunities for IBM," says Morningstar equity analyst Andrew Lange, who puts the stock's fair value at US$168.

The firm's investment in Strategic Imperatives division, which comprises cloud, mobile and big data, should improve the firm's economic fortunes. "The Strategic Imperative business continues to grow and will eventually become the majority of revenue, says Lange, pointing out that the company is "doubling down on higher-growth Strategic Imperatives, to counteract the growth shortfall."

IBM's Q1 2018 results reveal that the segment grew 15% and brought nearly US$38 billion over the last 12 months, making up 47% of overall revenue for that period.

 

Salesforce.com Inc.
Ticker: CRM
Current yield: -
Forward P/E: 59.5
Price: US$121.01
Fair value: US$145
Value: 16.5% discount
Data as of April 24, 2018

 Salesforce.com ( CRM ) offers a suite of services spanning customer relationship management, digital marketing, campaign management, customer service, analytics and application development, making it the largest pure-play software-as-a-service (Saas) company in the world. The wide-moat tech behemoth has multiple application clouds that deliver more than US$1 billion in annual revenue each.

"Salesforce has evolved into one of the world's true software powerhouses," says a Morningstar equity report. "The firm has established itself as the runaway leader in the pure-play SaaS market. Enterprises will increasingly turn to cloud computing to eliminate costly IT infrastructure and maintenance costs, creating a long runway for growth in each of Salesforce's product verticals."

A market leader in cloud-based software, the firm is pushing more aggressively into new big data-driven markets such as analytics and the Internet of Things. "As users across the enterprise continue to flock to the Salesforce platform for a bevy of use cases, we think the firm has a unique opportunity to position its analytics offerings," says Morningstar equity analyst Rodney Nelson, who assesses the stock's fair value to be US$145, which includes the impact of the recent US$6.5 billion acquisition of Mulesoft, a company that makes software that integrates disparate data, devices and applications to help businesses networks run faster, and whose client list includes  Coca-Cola ( KO ),  McDonald's ( MCD ) and Spotify.

The company's applications house valuable data about both employee efficiency and customer satisfaction. The quantum of data creates clear use cases for Salesforce Wave, a tool designed to help businesses find hidden insights and sales opportunities in their business and customer data stored in its analytics cloud.

"Salesforce's SaaS prowess and broadening application portfolio will propel the firm to more than US$20 billion in annual sales in fiscal 2022," Nelson notes.