Hard drives rarely seem interesting until yours crashes in the middle of an important report, but our digital economy couldn't exist without them. IBM (NYSE: IBM ) recently built the world's biggest hard drive, and to efficiently catalogue its contents the company developed a shockingly fast new file system. Dubbed GPFS, the system reduces the time it takes to look through huge numbers of files by a factor of 40. This speed boost could open the door for analytics companies to bring their services to the masses, and it might even give the sluggish disk-drive industry a second wind.
Data analytics is more pervasive than you might think. Companies accumulate data every day, and analytics companies help find trends and relationships in this big pile of bytes. From this starting point, strategies can be developed to maximize the good and minimize the bad. Analytics share a big part of the blame for this summer's market volatility, thanks to high-frequency computer trading, a highly visible but poorly understood type of data analytics. That's not hyperbole, as almost 70% of all market trades were initiated by computers on Aug. 8.
But not all analytics can wreak havoc on your portfolio. These data-centric companies could see major benefits if they can tap into IBM's speedier file system:
- Google (Nasdaq: GOOG ) is notoriously private about the size of its server farms, but it has been an analytical leader for years. As it continues to seek new ways to grow, its trove of data will make an ideal starting point from which to develop laser-focused marketing techniques. As Fool contributor Tim Beyers says, Google is stalking us all, but we're better off for it.
- SAP (NYSE: SAP ) bought Business Objects to break into the analytics space in 2007, and it's now looking like a smart move. The company expects business analytics to be a key growth driver in the future.
- Accelrys' (Nasdaq: ACCL ) lack of growth hasn't earned it many fans. Opening its services to scientists with smaller budgets could help get its mojo back, and a more efficient data-retrieval system could be a major component of the cost savings.
- Adobe (Nasdaq: ADBE ) purchased Omniture two years ago. Its analytical engine, which processes more than a trillion transactions each quarter, is an unusual complement to the Adobe Creative Suite. Faster analytics could become a real-time feedback mechanism in the Creative Suite development process.
Getting lonely at the top
Could the companies that make this speedy revolution possible see similar gains? The cutthroat margins of the hard disk drive market have brought a wave of consolidation that's reshaped the industry. Western Digital (NYSE: WDC ) and Seagate (Nasdaq: STX ) are in the process of acquiring Hitachi's and Samsung's hard disk segments, respectively, and will soon control a combined 90% of the market, leaving poor Fujitsu to dive for the remaining scraps. Despite all the innovations in storage over the past half decade, both companies have struggled to get over 10% net margins:
2010 Net Margin
2009 Net Margin
2008 Net Margin
2007 Net Margin
2006 Net Margin
Source: SEC filings.
As the dominant players, Western Digital and Seagate will have some elbow room to nudge their margins higher, but investors in these fully mature companies ought to expect respectable dividends, since there's nowhere else to go once you control the market for a necessary component. Seagate's already beaten Western Digital to the punch, sporting a hefty 7.1% dividend after its recent tumble. Western Digital has no excuse not to institute its own dividend now that it's formed a de facto duopoly with Seagate, and until that happens, Seagate has to be considered the investor's disk-drive champion.
Which company do you think will emerge as the top dog of this motley pack? Add them to your Watchlist and let me know with a comment.
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