Tomorrowland

Most parents who have ever taken their children to Disney World would probably agree with my observation that it is one of those experiences where when the vacation is over, you feel like you need a vacation. Any adult relaxation on such a trip may just be exhaustion by another name, but I still wouldn't trade my times there with my children for anything. The long lines and multiple excursions on the It's a Small World ride were worth every minute (and the indelible tune weeks later), just for the memory of my kids' joy and excitement. And even though the adult beverages are served in EPCOT, my favorite part of it all remains The Magic Kingdom. It was there in Tomorrowland that a different sort of memory became lodged in my mind. Tomorrowland is supposed to show visitors what life will be like in the future, but it came off as more retro than futuristic--something right out of The Jetsons cartoon. I am sure this area has been re-imagined and redone at least once since the late 1980s, but at that time it looked to be exactly what it was: a representation of how imaginative minds of the 1960s and 1970s had conceived of a technological future. Why is it that conceptions of the future, especially where technology is concerned, so often miss the mark?

First, the most obvious part of the answer is that imagining the future involves predicting what tomorrow will be like, and even the most logical projections of a technological path are prone to major errors. The other part of that answer, which concerns us as investors because investing does involve assessments of the future, is that people who design exhibits, write books, and make movies about the future typically are not concerned with matters of economics. (This is a good thing, because the Star Trek saga would be far less compelling if the story were all about how investment bankers put together the financing to build the first U.S.S. Enterprise.) The most exciting visions of the future are not likely to materialize if they don't make the economic sense needed to lure investment capital. This is why we are not all driving around with solar panels strapped to the roofs of our cars. A world of green energy would be nice, but the price of gasoline would have to be much higher--probably high enough to wreck the economy first--for any major shift to occur. The increased supply of natural gas attributable to new drilling technologies (fracking) has caused the price of natural gas to plummet, and that has made this fuel source more appealing economically than other alternative energy solutions. Our cars are probably going to be running on stuff that comes out of the ground for a very long time.

Thirty years ago a popular notion of future communications involved all of us having video phones on our desks. Instead we have smartphones that are more advanced than Captain Kirk's communicator. What used to travel over the airwaves (television) now predominantly comes through a wire (cable), and what once came through a wire (telephone service) now just as commonly comes over the airwaves. It's not just a matter of the proverbial "better mousetrap," but also a question of an innovation that works commercially. As investors, we need to take a hard look at what ideas and visions are attracting investment capital. In other words, we always need to follow the money.

Companies have always sought to find more effective ways to pitch their products and services to potential consumers. Budweiser, for example, may spend millions of dollars on a Super Bowl ad, and that's probably a good investment because lots of football viewers are also beer drinkers. One of the early examples of more targeted marketing and advertising was born when household products companies like Proctor and Gamble realized that many women were home during the day, and the soap opera was born, first on radio and then television. Companies love to reach that narrower, more well-defined audience of people who actually are the most inclined to purchase their products. Now, the goal of reaching that narrower audience is abetted by technology. Every time we swipe our debit card or conduct a Google search, we leave permanent footprints in cyberspace. These data trails contain patterns and correlations that can by identified and interpreted by computer software and used as a predictor of future behavior. Vivek Ranadive, the CEO of TIBCO Software (TIBX, $29), was on CNBC recently explaining how the firm's software is used in a casino to identify when gamblers have had a losing streak. This alerts someone on the staff to give that gambler some reward, such as free tickets to a show, to keep that person from leaving the casino. So, the capability here is not just about analyzing data after the fact, but also in real time. This is what is known as data analytics.

An article in The New York Times Sunday Magazine detailed how Target has discovered that women who are in the very early stages of pregnancy tend to purchase certain items--not diapers or strollers as you might assume, but something seemingly unrelated like coca butter skin lotion. This information allows the company to send these future mothers promotions for things like diapers and other newborn-related products, with the idea of getting them in the habit early of shopping for all of their baby needs at Target. The story relates how a man called Target irate because his teenage daughter had been receiving promotions from the retailer for various baby products. The manager who took the call apologized, only to have the man call back weeks later to apologize himself, as he had just found out that his teenager was, indeed, pregnant. All of this may have you squirming with the realization that Big Brother has you under his watchful, ubiquitous eye (think twice before you post those bachelor party pictures on Facebook). For our purposes, though, the simple lesson is that companies will spend money on products and services that either reduce their costs or increase their revenues. The precise nature of the future may be cloudy, but the contours are taking shape around the collection, storage, and analysis of "Big Data." Companies have been collecting such data for years, but what is new is the ability to make smarter and faster use of such information to make better decisions.

The business of Teradata (TDC, $69) is all about data warehousing and enterprise analytic technologies. Earlier in May the company reported earnings of  $.60 per share compared with a consensus estimate of $.56, with revenues coming in at $613 million versus an expected $587.52 million. The company also raised revenue growth forecasts to the 12%--14% range from a previous 10%--12%. Several investment firms raised their prices targets, which now range from $87 to $91.

The other part of the larger trend here involves the migration of computing power and storage to what is commonly known as "The Cloud." As we have noted before, just as computer power moved from the central mainframe to the desktop, that is now tending to move towards a network of servers, so that what once was installed and stored on your personal computer is now moving "out there" to the cloud. Ultimate Software (ULTI, $79) is involved with what is known as Software as a Service, or Saas. They offer businesses online payroll processing services, so that this business function can now be handled over the Internet rather than with software on the company's computers.

Another technological development that seems firmly based in reality is the emerging trend in mobile payments. As we have noted before, Visa (V, $118) acts as a toll collector in processing transactions; the company does not take credit risks. Of course, when there is less traffic on the highway, not as much money will be collected in toll fees. So, the one thing we need to remember about Visa and other "toll collectors" is that their business will rise and fall with the level of economic activity. Another interesting company in this space is PayPal, which is now part of eBay (EBAY, $40). According to Argus Research, PayPal will be coming out with new features that will allow shoppers to store coupons, gift cards, and loyalty points on their mobile devices for use at the point-of-sale. The company will be able to integrate customer purchase data with its geo-location service, Where, to target customized offers to people based on their location. And, you will soon be able to pay for your purchases before you arrive at the store. Also worth noting here is that Verifone (PAY, $45) makes the in-store terminals for processing transactions.

No matter how compelling or attractive the vision, no one can will or dream a successful enterprise into being. To acknowledge the key role of investment capital and economic calculations is not meant to throw cold water on utopian dreams of the future, but such realistic thinking can serve as a means of separating what sounds appealing from what actually works. You may not have a robot to cook your dinner, but you may be able to preheat your oven using your iPhone. More important, the latest technological innovation and application may not be a gadget you hold in your hand, but instead something lurking in the background that is keeping tabs on your shopping patterns--and ringing the cash register for businesses.

Checking the Radar Screen

All of these collections of data need to be protected, and that is the business of Sourcefire (FIRE, $54), which specializes in Internet security. The company reported earnings of $.11 per share versus an estimate of $.08, and the stock has been holding up relatively well in a very challenging market environment.

Disney (DIS, $44) reported earnings of $.58 per share, ahead of the $.55 estimate, and this is another stock that is holding its own in this tricky market. The Avengers is a blockbuster hit for the company's Marvel unit.

As of mid-day Wednesday, the yield on the 30-year Treasury stands at 2.83%, with the yield on the 10-year at 1.74%.

Life is short. Get busy.

Jim

Disclosure/Disclaimer: My family members and/or I own shares of TIBX, TDC, ULTI, V, EBAY, PAY, FIRE, and DIS. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as investment advice or the recommendation to buy or sell any security.