Client Portals

Data Is Acknowledged In Prices, Not Yet In News3 min read

Jul 7, 2020 - Max Osbon ( 5 mins to read)

Yuval Noah Harari is well known for his 2011 book, “Sapiens”. It’s a must read for everyone, regardless of their career or backgrounds, as it gives a thoughtful and thoroughly researched background on our civilization’s progress to date. His latest book, “21 Lessons for the 21st Century (2018)”, offers insights on how the information age is shaping our society. Unsurprisingly, the theme of “big data” comes up often. When we look at markets, it’s easy to see that companies with expertise in big data management are thriving. The financial media does a poor job of explaining this phenomenon. Here’s our take:

Widgets vs Data

It’s estimated that Apple pays $443 in materials to build an iPhone that retails for $1,249 dollars. They make it, you buy it. They keep the profits, and so do their investors. It’s a simple business model. What isn’t so simple is… Apple has moved way beyond just widget sales. Apple plans to aggregate all of your health data through its Health OS, and that has big implications.

When Apple collects your health data, it’s looking at your heart rate, daily steps, sleep patterns, running and biking habits, reps during your workouts and in some cases even your fertility cycles. All of that data is ending up in a single reservoir. The future value of that data and the ability to collect it all in one place may be worth 100x more than any widget’s profit margin.

Data in markets

Tesla produces roughly 400K vehicles per year, while Toyota makes over 10 million in the same period. Despite the massive gap in production, Tesla has the highest market capitalization of any car company in the world (as of recently, they just surpassed that of Toyota). It’s fair to ask how in the world is Tesla worth more than Toyota when it produces 5% of Toyota’s volume… and has never been profitable.

Perhaps the answer lies in big data set collection. Tesla has been tracking every turn, path, distance, acceleration and deceleration of each and every one of their customers for 15 years. That data set is growing at an exponential rate. When paired with AI, Tesla could be the first to crack fully autonomous driving. When the financial media says, “but Tesla is just a car company”, they are comparing widgets to data and probably missing the point altogether. In other words, the opportunity lies in data, not widgets, and Tesla and Apple are not the only examples.

Getting the benefits

There is probably a solid investment thesis that says to simply invest in companies that prioritize data collection. I’d guess that you can find well over 100 examples in public markets where curiously high stock prices are significantly correlated with forward thinking data collection practices. Now that we’re analyzing markets in terms of BC (before covid) and AD (after distancing), consider that data-oriented companies may be harder to value and appear to be unreasonably expensive by most traditional measures.

Big data sets are incredibly flexible and scalable and, given their digital nature, are resistant to pandemics. When AI tools are paired with big data sets, predictive analytics and algorithms will have more power to harvest valuable insights. Remember that as early as 2012, Target was able to predict pregnancies when its data algorithms discovered that buyers would switch from scented to unscented cleaning products, and shortly thereafter, to baby-related products.

If you’d like to understand more about how big data practices could impact our society and our largest companies, I strongly recommend reading Yuval’s 21 Lessons for yourself.

For investors, it’s important to consider how powerful innovation-based cultures can be when paired with scalable tools. I expect big innovations to come out of our largest innovation forward companies in the next 5-10 years. Investors who look past widgets and into big data may find themselves less worried about the future of markets. Please let us know if you would like to see how we are taking advantage of these trends for our clients.

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