The technology sector is one of the fastest growing sectors these days. According to FactSet, the sector saw an average revenue growth rate of 4.9% in the fourth quarter of fiscal 2013, second only to the health care sector. The Internet software and services sub-sector recorded the fastest growth at 20%. Year-to-date, the tech sector's performance, as represented by the iShares US Technology ETF (IYW -0.72%), has comfortably beaten the SPDR S&P 500 ETF.
Adam Parker, head of Morgan Stanley's U.S. equity team, recently upgraded the tech sector from market weight (20%) to overweight (22%). He singled out big data and analytics as the tech sub-sector where the biggest growth will be found.
One of the biggest growers in this space has been Splunk (SPLK), which provides software that enables companies to track, comb, and analyze data in real time. This software has wide applications, including the ability to track security-related activities in real time. Splunk operates alongside another newcomer, Tableau Software (DATA), as well as older heavyweights like International Business Machines, EMC (EMC), and Google, which runs BigQuery, a cloud-based data analytics tool.
Splunk is a relative newcomer to the market, having gone public in the spring of 2012. Like many other rapidly growing upstarts, the company does not have much in the way of earnings. But, its revenue has almost doubled in that short time, as huge buzz about the company's disruptive software helped push its market cap to $10 billion.
Splunk records positive earnings for the first time
Splunk recorded fairly good fourth-quarter results after it managed to return a profit for the first time since it started trading. Although its net income of $0.03 per share was below consensus estimates of $0.05 per share, this was the first time the company crawled out of the red zone.
Splunk's price-to-sales ratio has shot past 30, which is a princely sum to pay even for the hottest name in big data. Even insiders seem to think shares are a bit too pricey, as no insider has made open market purchases within the last 12 months.
Tableau Software's story is similar to Splunk's. The company, a leading provider of visual analytics software, became public in May 2013 at just $31 per share. Barely 10 months later, the share price has almost tripled to $91. Investors have been excited by the company's latest results after it blew away analysts' revenue expectations. Year-over-year quarterly revenue shot up an astounding 95% to stand at $81.5 million, with full-year revenue jumping 82% year-over-year to hit $232.4 million. Full-year GAAP diluted earnings for fiscal 2013 was $0.12 per share, compared to $0.00 a year earlier.
The two newcomers are, therefore, growing at a blistering pace. Tableau Software, however, pips Splunk on account of growth in both its top and bottom-lines, while Splunk is having trouble making a profit.
Splunk has also been growing inorganically through acquisitions. The company acquired Cloudmeter last December, which provides network data capture technologies. This acquisition will enhance Splunk users' ability to analyze machine data directly from their own networks, after which they can correlate it with other machine-generated data to gain better insight across Splunk's application and infrastructure management.
Splunk is also netting big customers. IDT, a leading telecom and payment services provider, announced in March that Splunk Enterprise 6 will soon become its core operational intelligence platform. IDT will replace its legacy database technology with Splunk Enterprise across its entire organization.
Splunk and Tableau Software have announced a strategic technology alliance that will leverage real-time machine data and visual analytics. As part of the deal, the latest Tableau software will incorporate Splunk Enterprise as a native data source that will use Splunk's recently launched ODBC driver. Tableau software customers will now be able to better visualize their machine data.
Slower growth, fairer valuation
At the opposite end of the spectrum are IBM and EMC. Both companies have a significant footprint in providing cutting-edge enterprise data analytics and solutions. The two may not be as dynamic as Splunk or Tableau Software, but what they lack in buzz they make up for in attractive valuations. It's quite likely that shares of both will receive a much-needed lift if big data mining remains hot property.
Google lies somewhere in the middle, between the fast growers and the slugs. The company, of course, gathers mountains of data for its own purposes. It also runs BigQuery, a cloud-based data analytics tool. Google has very sound fundamentals, too, which makes it an excellent way to play the sector without risking burning your fingers.
Foolish bottom line
Big data is the buzzword in the tech sector, at least for the moment. Newcomers are growing rapidly, and their shares are considerably more expensive than the "old boys." It would be a good idea to have a well-balanced mix of shares in your portfolio to offer you the best of both worlds.
