Do you know Splunk? It’s a company — in the scaldingly hot realm of big data — whose name is derived from “spelunk,” which the company uses as a metaphor for locating something in a giant, dark cave. Splunk helps clients track usage to shore up weaknesses in electronic systems, while also extracting meaning from massive repositories of digital information. Its revenues have jumped 10- fold in four years, though the company has yet to record profits. Even as the Nasdaq surged 33% over the past year, Splunk’s stock has jumped 150%.
“Big data” is a bit like “the cloud” a few years ago: Simply having the moniker attached to a company means that not only is it in a growth area, but it’s also likely blessed with a stock market premium. For investors that means risk — in the form of high prices and nascent companies with uncertain futures — but also opportunity. Consolidation is afoot, and tech behemoths are snapping up big-data outfits. Smart investors can benefit.
How big is big data? Well, the average company in 15 of 17 U.S. sectors now has more data stored than the Library of Congress, according to McKinsey. Organizations from BlackRock to Facebook to the U.S. government (especially the government, if Obamacare is any indication) need top-of-the-line technology to sift through it. According to McKinsey, a retailer that understands its information can increase operating margins by 60%. Demand is soaring for Splunk and its ilk.
Result: Investors have pushed Splunk’s stock price to a dizzying 16 times projected 2014 sales, far higher than Internet companies like Facebook, making Splunk worth about $7 billion. Other stocks viewed as big-data plays have taken off as well. For example, security company FireEye trades at a price/sales ratio of 17, even higher than Splunk’s. (FireEye acts as an electronic border control, sniffing out potential bad guys every time information comes in or out of a portal. Whenever there’s a high-profile data breach, FireEye’s services are in high demand, and the company is growing even faster than Splunk.)
It’s hard for nontechies to assess these companies’ prospects and perilous to wager on them. But larger software players are diving in — they’re looking to find growth by bolstering their big-data offerings — and investors can ride their coattails. IBM, Cisco, and Dell have recently bought similar companies. Analysts say Juniper, Oracle, and Hewlett- Packard could be aggressive buyers as well. Other sophisticated acquirers are on the prowl.
One way to benefit: Buy shares of a diversified ETF, such as iShares North American Tech- Software. This ETF includes many of the big-data guppies, as well as the whales that may well swallow them. By spreading your bets, you probably won’t enjoy the bonanza that comes with putting all your chips on a lucky winner. On the other hand, you’re way less likely to put all your money on a loser, and you can profit from the growth of a rising segment.
This story is from the February 3, 2014 issue of Fortune.
