The big problem with big data

‘Big data’ is a term that we see a lot these days. It’s a fairly innocuous sounding moniker and few people fully understand how it relates to them. Data is valuable and companies are hungry for more and more of it – personal details are being harvested on an industrial scale. But there is a serious risk that discomfort grows among users as they wake up to the scope of intimate knowledge that is being accumulated.

Social media companies are one of the main proponents of this rush for ‘big data’. Companies advertise on social media on the assumption that the platforms know more about their users than anyone else. Precisely targeted adverts are a marketer’s dream; and for the social media platforms the economics are favourable – their key input has no cost, after all.

As for the users, largely oblivious to their lives being recorded, they apparently get something for nothing.

In theory, there is a tacit agreement between users and online companies: an individual agrees to exchange their personal information and a service is provided in return, seemingly free of charge. And if something’s free, then often you are the product.

Among the myriad of intimate details, it is said that Facebook knows your political leanings, where and when you have travelled, where you live and work, and even what is going on in your relationship. Eventually, all this data is used to generate ad revenue.

But signs of a backlash against this business model are emerging. We’ve seen a sharp slump in Facebook’s share price after it disappointed investors with lacklustre profit forecasts. The shortfall in growth was partly blamed on the need for new privacy controls. Consequently, growth is proving harder to come by.

And the backlash could have much further to run. Facebook has been embroiled in controversy after it allegedly allowed users’ data to be misused by Cambridge Analytica. If people become more wary about sharing their data, it will be harder for social media platforms to target ads effectively. That could have enormous implications for their advertising sales.

If advertising revenues were to decline, would the platforms start charging their users? Everybody loves getting something for nothing, but what would people actually pay for? Even a small monthly subscription might seem a lot to look at people’s holiday snaps. And there’s no shortage of other distractions on the Internet.

Scandals like the Cambridge Analytica affair also open the door to political attacks. Populist politicians like to castigate big businesses for poor behaviour. Social media companies are obvious targets – especially when they’re seen as interfering in politics. President Trump has recently railed against a perceived bias in how Google operates.

Such political pressures could intensify the regulatory threat. Since its inception, online business has benefited from operating in a regulatory ‘Wild West’. But in time, the frontier will be tamed. Data use will be tightened and monopolies may be broken up. And when change comes, investors may have to reassess the valuations of the tech firms that are currently the toast of the stockmarket.

As contrarian investors, we believe that good times don’t last indefinitely. All businesses succumb to the cycle sooner or later and we don’t think the market’s current darlings will all prove immune. That doesn’t mean that some of the big tech stocks won’t go on to greater things. But given high expectations and matching valuations, these stocks can’t afford to disappoint investors. If they do, it’s a long way down.

In contrast, unfashionable stocks that have been discarded in the great tech rush could offer a lot of upside if they produce positive surprises. So, rather than put money into shares that might be ripe for a fall, we prefer to look for opportunities in those with the greatest room to rise.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this blog should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.