What Investors Must Know About Big Data

At a recent conference in San Francisco, Twitter CEO Dick Costolo shared his favorite illustration of the power of "big data." Researchers from Johns Hopkins University, according to Costolo, were able to track the spread of influenza by analyzing 2 billion public tweets. While each individual tweet in isolation may not have been particularly helpful to the researchers, the entire data set proved to be extremely valuable.

The ability of companies to collect and analyze large data sets will disrupt entire industries in the future and will create tremendous opportunities for investors. According to an insightful study on "big data" by the McKinsey Global Institute, the use of large amounts of data will become central to competition and growth for individual firms. Knowing which companies will benefit and which ones will suffer will be critical for investing success in the future.

300 million photos per day
According to McKinsey, "big data" refers to "large pools of data that can be captured, communicated, aggregated, stored, and analyzed." In recent years, we've reached a turning point where our capabilities with big data are increasing very rapidly. And the scale of that growth is truly remarkable.

In its study, McKinsey defines an "exabyte" of data as being the equivalent of "4,000 times the information stored in the U.S. Library of Congress." In 2010 alone, enterprises stored 7 exabytes of data, while consumers stored 6 exabytes. As an example of the mind-boggling amount of data that is being produced each day, Facebook (NAS: FB) recently reported that its users were uploading 300 million photos per day.

It seems logical to believe that companies that can use big data effectively will outperform their peers. McKinsey estimates that retailers with an effective big data strategy might be able to improve their operating margins by more than 60%. In another study from MIT, researchers found that large, publicly traded firms that use data-driven decision-making have "output and productivity that is 5%-6% higher" than expected.

Three strategies for investors
Given that big data is transforming our world and that companies that embrace it might outperform the competition over the long term, then investors might consider following these three strategies:

  1. Look for companies with the ability to use big data effectively. Amazon.com (NAS: AMZN) is a perfect example of a company that has been able to differentiate itself from other retailers by using big data. Millions of people shop at Amazon.com, and the company uses all of that data to recommend additional purchases for each of its customers.

    The results of this model for Amazon.com are simply staggering. It currently captures one-third of all online sales and is growing its sales four times faster than the average for e-commerce in general. This company is a leader in big data, and I suspect it will do extremely well in the future.

  2. Consider companies with big and growing networks. Facebook, Google (NAS: GOOG) , and LinkedIn (NAS: LNKD) are able to collect almost unbelievable amounts of information from their users, and this data will present them with enormous opportunities in the future.

    For example, LinkedIn now has 161 million members who are on pace to do 5.3 billion professionally oriented searches in 2012. Earlier this year, CEO Jeff Weiner said he is seeing a very meaningful data advantage coming from its platform. And this data advantage is already fueling its business. As its member base becomes more and more engaged, it seems likely that LinkedIn will become one of the winning companies of the future.

  3. Avoid companies that are ineffective at using data. One of the big stories in recent years is the failure of many big-box retailers to respond effectively to the disruptive threat posed by Amazon.com. Best Buy (NYS: BBY) , which reported a $1.7 billion loss earlier this year, is one of the latest examples. Just last month, the company announced that it is closing 50 stores around the country -- two of those 50 will be Washington-area stores.

Best Buy interim CEO Mike Mikan at least recognizes the problem. As part of Best Buy's turnaround, he vowed that it would pursue a world class e-commerce capability, while also becoming smarter about using data. A failure to execute in those areas may result in continuing losses for the company. In the future, companies without a big data strategy will probably underperform or go out of business. Investors will want to stay away from such companies.

Toward an understanding world
Saul Wurman, the creator of the inspirational TED Talks, recently said that "we're in a data world, but not an understanding world." In recent years, we've become extremely adept at collecting and storing huge amounts of data, but we're still finding our way when it comes to analyzing and understanding the meaning of all this data. The companies that win in the future will probably be the ones that can better understand all of this information and then use those insights to provide excellent products and services for their customers. Identifying those winning companies will ultimately result in big returns for investors.

If you're excited about data as a game-changing trend over the next decade, The Motley Fool recently issued a free research report called "The Only Stock You Need to Profit From the New Technology Revolution." Inside, we'll reveal a company that has achieved considerable gains since first recommended by the Fool. Best of all, our analysts believe it still has room to run. Access your report - it's totally free.

The article What Investors Must Know About Big Data originally appeared on Fool.com.

John Reeves owns shares in Google. You can follow him on Twitter,@TenBaggers. The Motley Fool owns shares of LinkedIn, Facebook, Best Buy, Google, and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Google, and LinkedIn. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.