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2020s Vision: Alternative data – clicks over cash flows

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

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    Tellimer Research
    18 December 2019
    Published byTellimer Research

    Wherever you are, someone (or something) is always watching. But don’t let that put you off. Anyone who has ever shopped online, created a social media account, made an in-person card purchase, driven a car on a public road or simply stepped into a retail establishment has contributed to the vast trove of what is now known as alternative data. This encompasses all non-traditional forms of information – everything from clicks, swipes and searches to likes, views and footfall.

    In sectors such as retail and technology, alternative data has been a mainstay in periodic reporting for some time. Use of such data is undoubtedly more widespread now. From popular televised talent shows to results presentations, alternative data is extensively used – we often hear more about You Tube views than album sales, and in some banks’ results presentations, there is more of an emphasis on application downloads than capital or liquidity metrics.

    It is estimated that the total buyside spend on alternative data will exceed US$1bn this year, up from less than US$250mn just three years ago. To meet investors’ needs, the number of alternative data providers has increased significantly in recent years, with such providers now exceeding 450 according to alternativedata.org. But can this additional information really be useful? We think so.

    In a world where yields remain quite low and where figures reported by companies operating in the same industry can look quite similar, alternative data can help investors better differentiate among competitors. Further, such data may serve as a leading indicator – alternative data may point to significant potential changes in profitability and other metrics. It is also possible that alternative data may better explain trends seen in already-disclosed figures. Added to this, alternative data can be useful in valuing companies operating in new, or less well-known sectors or providing unique services. In such cases, the traditional income statement, balance sheet and cash flow figures are often less easy to apply.

    The impending death of results season?

    After many painful weeks, this analyst is still in the throes of yet another brutal results season. Could an increase in focus on alternative data bring some form of panacea? Some relief from the seemingly never-ending barrage of figures? The answer, as with many questions worth asking, is both yes and no.

    Alternative data may become even more important over time, as such data becomes more easily available and as new technologies continuously transform various industries – from banking to construction and to mineral extraction. Further, there is likely to be an increase in focus on data such as environmental and social impact scores. In our view, this data may only serve as a supplement to traditional financials. As is well known, the graveyard of collapsed corporates is populated with entities that may have had excellent alternative data but did not have the strong financials to support this. Put simply, clicks and views may not convert into cashflows; and cash is still king.

    There are other pitfalls in using alternative data. First, there may be little historical information available – some estimates suggest that 90% of the data available now was created in the past couple of years. This means that back testing to see if the data would have served as an adequate leading indicator, for example, may not be possible. Added to this, not all data is equal – some types of alternative data may have more predictive or other ability than other forms of data, and this may not be known ex ante. Interpretation is also a potential pitfall – given that much of this data is new, it may be unmanageable or unwieldy, or the right data may be interpreted wrongly. It is also worth noting that we may not fully know what lies behind a click or a view – such actions may not be intentional and may be the work of bots rather than real users. This data can be expensive to retrieve and store, or may take a significant amount of time to manipulate into usable form. Finally, the availability of web-based alternative data may change if platforms such as Solid, which can restrict tracking, gain popularity.

    Notwithstanding these limitations, we do believe the importance of non-traditional metrics can only increase. What will be vital is finding the right balance between ‘ancient’ and ‘modern’ metrics. That balance will likely differ from one industry (or company) to the next.

    Chart: Total buy-side spend on alternative data (US$mn)


    Source: AlternativeData.org

    Read our full 2020s Vision: 20 themes for the next decade report.