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.
If your friends and colleagues are interested in investing, please use this link to forward this article.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.