The data economy is evolving rapidly, bringing investment opportunities in network infrastructure, memory, storage and cybersecurity, as Jason Bohnet explains.
4 minute read
From the proliferation of the internet to the creation of the smartphone and tablet, and innovations such as artificial intelligence (AI) and cloud computing, society has fundamentally changed over the past two decades.
The average person checks their smartphone every twelve minutes, spends a combined four hours a day on social media sites and video streaming services, and “googles” over 100 times a month. Amazon Prime members spend on average over $100 a month on Amazon goods, while each of Facebook’s 2.2 billion users generate around $20 of revenue for the company annually.
One of the less spoken truths of these platforms, until recently, is the collection of user data. While personal data has been leveraged for decades, the quality and attribution of that data has dramatically increased in the digital age.
The adage “half the money I spend on advertising is wasted; the trouble is I don’t know which half” no longer applies. Platforms know exactly who you are, where you are, who your friends are, your interests, the media you watch, what you read, what you search, and can extrapolate things you didn’t know you want based on AI.
The battle for user data
As the amount of data increases exponentially, so does its value. It is clear the bigger technology companies are becoming more and more concentrated and sticky for their users - a trend that seems likely to continue. There are monopolistic platforms for all our daily digital habits: from search to social media, and music streaming to online shopping; with these services accessed via one of the dominant smart technology manufacturers.
As of now, there seems little likelihood of the major platforms being knocked off their perch given their size and scale. While history would suggest no company should have so much power and influence, suggestions they should be broken up are problematic. As the tech behemoths have continued to expand into new areas, they appear to be focused on extracting even more value for their customers. Amazon, for example, has broadened out significantly from e-commerce over the past few years; utilizing its technological infrastructure to create Amazon Web Services, the largest cloud-computing company in the world, and most profitable part of its business. Amazon has also expanded into media, music, gaming, audiobooks, logistics, fashion, natural-language processing and groceries to appease what chief executive Jeff Bezos calls Amazon’s “divinely discontent” customer base.
Making matters even more difficult, the company is embedding these capabilities across its platform: take any of the pieces away and the remaining parts would likely be worth less. If you broke up Amazon Web Services from the rest of Amazon - if that’s even technologically possible - it would lose the utilization and learnings from the rest of Amazon’s technological infrastructure and force the rest of core Amazon to purchase new infrastructure. The likely result would be higher costs for both customer bases.
The data economy
These platforms continue to dominate due to their proprietary data. Whether it comes from users, business, the supply chain, retail or logistics, the differentiator is data. In a world where emerging technologies like AI, cloud computing, machine learning and computer vision extrapolate existing data and come to new conclusions, control over data is paramount.
As the world of AI and cloud computing become more mainstream, you need more data to get better (artificial) intelligence, which creates more data to become more efficient and so on. It is a virtuous cycle. Furthermore, users’ habits continue to become even more data-enabling. As we continue to spend more of our time on digital devices, living in smart homes and smart cities, working in smart factories, ride in autonomous vehicles, and get remotely monitored for health risks, it is easy to see how data growth is exploding.
In collaboration with PWC, The Economist in May noted: “Data is to this century what oil was to the last one: a driver of growth and change… Artificial intelligence-related growth will boost global GDP $16 Trillion by 2030.” The potential of the data economy is massive.
Looking beyond platforms for opportunities
Some of the biggest cloud-infrastructure companies are part of the incumbent platforms: Amazon Web Services, Google Cloud Platform, Alibaba AliCloud and Microsoft Azure. These companies enjoy duplicative advantages as they have the proprietary data, can afford to employ thousands and thousands of data scientists in AI and machine learning, and have the ability to run neural networking computing through their own infrastructure. This means that the potential moat for their business is widening further. Given their size, it’s no wonder that they are the typical anchors of the data economy. However, there are other potential investment opportunities, including in infrastructure, memory and storage, and cybersecurity.
All elements of the data economy require infrastructure to be laid before the truly exciting things happen. You can’t have “smart” things without connectivity - either cellular or broadband. 5G is a potential technology that limits latency enough to facilitate truly autonomous vehicles, requiring a massive amount of spectrum deployed across huge cellular towers and small cells with fiber.
There is no doubt 5G will be a major driver of future infrastructure-related revenues, but it is early days. The most likely beneficiaries on the infrastructure side include companies who own major data centers, telecom towers, and those who provide the specific networking equipment to enable mass connectivity.
Memory and storage
Once they have the required infrastructure to connect and transmit data, platforms need a place to store, process, and analyse it. In most cases, the data will need to be readily available to be processed by AI. This usually requires non-volatile storage such as NAND and hard-disk drives. There are also computational-intensive technologies that require a large amount of DRAM memory.
Meanwhile, as autonomous vehicles become more prevalent, it is easy to see the proliferation of memory throughout the vehicle. An autonomous vehicle will likely have over forty sensors, multiple cameras, multiple radars, LIDAR (light imaging detection and ranging technology), and require computer vision for safe navigation. This equates to over four terabytes of data created per vehicle per day – a similar amount of data to what would be churned out by 60 iPhones.
The makers of memory and storage equipment, as well as the companies who make the component parts for that equipment, are potential beneficiaries.
Even though we live in the most innovative and prosperous time in humanity, it is the most dangerous from a cyber-security perspective. Billions of people worldwide are willing to accept the risks of putting their personal information on the internet to gain access to tech platforms.
While the value of data is increasing, security is becoming challenging as trillions of devices are being used across multiple internet networks and multiple clouds; pumping out data that bounces across the globe in milliseconds. Major breaches of user data could have stark consequences for platforms; as such, cyber-security companies who can help reduce this risk have much to gain.
There is no doubt we are in a paradigm shift, moving from the digital economy to the beginning of the data economy era. Long-term investors could see a healthy risk-reward from exposure to this key theme. While our digital habits will likely continue to be served by major platforms, which should lead to continued upside for these companies, there are plenty of opportunities at attractive valuations in the key areas powering the data economy: infrastructure, memory and storage, and cybersecurity.