Head in the clouds

Economy | Fri 25 Jul | Author – Business & Finance head in the clouds graphic

Head in the clouds or riding the cusp of a wave, Aidan Donnelly looks beyond the hype and finds that tech firms that stay the course through choppy waters, offer the most potential for return.

One of the key tenets of technology is that it allows us to do things faster, better and cheaper than we have done in the past. We stand on the cusp of many large secular trends that will change the landscape in more ways than we can imagine. Terms like ‘the cloud’ and ‘big data’ are fundamental elements of a wave of technological change that can best be summed up by: store it, secure it, analyse it, access it.

The cloud and big data bring two new dimensions in the form of ubiquitous access and applicability. So pervasive are they, it is not inconceivable that they have the potential to have an even greater impact on our world than the discovery of electric power.

Hey you… get on to my cloud!

The traditional data centre provided a model in which a single computer application required a fixed set of hardware resources to support it, including a server, fixed network access, and storage.

Given technological constraints, the environment was rather inflexible, as running multiple applications on a single server created insurmountable complications due primarily to resource allocation issues. As such, an entire server was generally devoted to a single application which proved to be an expensive proposition, especially after considering the high levels of underutilisation that typically occurred.

The inadequacy of the model eventually opened the door for a technology called virtualisation — pioneered by a company called VMware in the early years of the last decade — that enabled individual servers to be used, not in singular blocks but as a pooled resource. Virtualisation promised greater efficiency and higher utilisation of existing IT assets as well as a reduction in capital expenditures on servers given the inherent benefits and consolidation that the new technology enabled.

Deployment of virtualisation software has coincided with, and has been fuelled in part by an explosion in data growth and the need to manage that data. The natural evolution of this shift is cloud computing.

Cloud computing has many widely debated meanings but at its core is the concept of gathering computing resources (servers, storage, applications) into a shared pool and delivering these resources or application functionalities as a service either within, or from outside the organisation, on a per use basis. The benefits of cloud computing, particularly for smaller companies with limited budgets, are significant. It is the most efficient method for many enterprise functions that otherwise would be prohibitively expensive for start-up companies to utilise.

The proliferation of the supply and demand for data creates huge opportunities for companies but it is essential to recognise the right data in real time and then the key is to have the ‘tool’ that will be able to see patterns in the data and predict outcomes ahead of time, allowing decision makers to act proactively rather than reactively.

Who you calling BIG?

While it is a common term, ‘big data’ is difficult to define with precision, and is often better recognised based on properties. Key elements include a tremendous amount (volume) of information, which often is growing through ongoing streaming or collection (velocity).

Data is often collected from diverse and unrelated (variety) sources. Much of this data is unstructured, meaning there is a lack of immediate clarity of content or purpose, and is often not created for the purpose at hand.

The amount of digital information that is being generated, stored, processed and analysed each year is increasing at an exponential rate.

Many companies have looked to big data as a means of benefitting their corporate intelligence, aiding in resource allocation, and advancing productivity. Businesses have long understood that there is value to be extracted from the burgeoning volume of data. The potential benefits are numerous but include areas like generating new business insights; improving core operating processes; enabling faster, better decision making; taking advantage of changing value chains; and creating new data centric businesses.

What has changed to lead to the big data revolution? Data processing and storage costs have decreased by a factor of more than 1,000 over the past decade.

Powerful analytical techniques have emerged and new technologies mean that data no longer has to be stored in a rigidly structured form to be processed. Now information can reside in whatever form it naturally takes — from Facebook posts to audio recordings of customer service calls — in geographically dispersed centres or in the cloud.

Cloud cover to increase dramatically

The investment implications of both of these technologies will likely be far reaching. For some companies they will sound the death knell of their business models. For others, they could be massive enabling forces — allowing many more start-ups to get up and running than would have been possible in the past.

Their impact will likely spread far beyond the IT sector and change how companies design, market, sell, and supply their goods and services.

For those that embrace the technologies, the benefits should be great, opening up new markets, products and services that heretofore may not have been possible.
They also have the potential to change how managements run their businesses, making companies more efficient by reducing costs and improving profit margins and are likely to even have implications for the provision of public services and how local and state governments operate.

The cloud and big data bring two new dimensions in the form of ubiquitous access and applicability”

Within the IT industry, there will also be winners and losers. As with all previous waves of technological change, the hype surrounding both of these technologies has, in some cases, been priced into the share price of the companies before the business models have been developed. This has seen sky-high valuations being attributed to some stocks more in hope than in reality. In time, these excesses should be corrected as the hype gives way and the long-term winners emerge.

Companies with truly unique or novel products or services capable of sustaining a business model or those that have proven themselves adept at navigating and benefiting from prior technological changes will be the ones that will succeed and should reward investors with returns in the long-term.

The key to successful investing will be to see beyond the hype and look for the companies that are appropriately valued for the potential they offer. For some of the smaller companies that prove successful, the likelihood of being an acquisition target is very high. The larger players will seek to fill gaps in their offerings by pursuing a ‘buy rather than build’ approach.

As the landscape evolves, market sentiment will ebb and flow towards the space and the best returns will accrue to those that stay the course through the choppy waters.
The future is exciting and for once it might not be a bad thing to have your head in the clouds!

This article is a summary of an Investing Insights white paper on technology. The white paper provides in-depth research into industry trends, interviews with leaders of multinational tech firms based in Ireland and discusses the implications of the rapidly changing landscape in the technology sector.
If you would like to receive a hard copy of the white paper, please contact Davy on +353 (1)614 8778 or email: privateclients@davy.ie

Aidan DonnellyAidan Donnelly is a senior equity analyst at Davy Private Clients. Views expressed in this article reflect the personal views of the author and not necessarily those of Davy or Business & Finance. Follow him on Twitter @aidandonnelly1.