Big Data is increasingly becoming synonymous with "big valuation," as investors bid up those companies turning the seemingly insatiable enterprise demand for data analytics into real revenue growth. As a vendor of high-end data, warehousing and analytics, Teradata (NYSE:TDC) is very definitely benefiting from this demand. What's not so clear is whether new investors will earn a great return from here on.

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Warehousing Profits
Companies in industries like finance, communications and retail generate huge amounts of data, and data mining or analyzing that data for exploitable information is an invaluable part of competitive advantage. This is where Teradata steps into the picture, with its high-end warehousing solutions and analytical capabilities.

Teradata focus on extremely demanding and complex environments, and boasts an impressive degree of scalability. In comparison, a lot of competing products from the likes of Oracle (Nasdaq:ORCL), IBM (NYSE:IBM) and Microsoft (Nasdaq:MSFT) are initially designed for less-demanding environments and warehousing capabilities are added on top of that. What that means in English, then, is that Teradata designs its solutions for its core market, whereas its competition doesn't necessarily design with the same end market in mind.

Data Mining For Investors

Impressive Near-Term Results
Certainly Teradata's offerings seem to be working in the market today. For eight straight quarters, Teradata has reported double-digit year-on-year revenue growth while margins have likewise been on the way up. Return on capital has not followed that same positive trajectory, though the absolute level of return on invested capital (ROIC) at the company is quite competitive.

Competition Will Always Be Coming
Although Teradata is currently riding high on the high-end, bears seem to believe that this won't last. Large software companies like Oracle, Microsoft, IBM and SAP AG (NYSE:SAP) continue to fine-tune their products to better-handle the large data warehouse market. At the same time, they continue to augment their analytical capabilities and their capacity for dealing with things like unstructured data.

Oracle has Exadata, IBM has Netezza (among other data center/warehouse subsidiaries) and EMC (NYSE:EMC) has Greenplum. Any or all of these could be threats to Teradata's existing business. That said, competition is not easy in this business - a company like Wal-Mart (NYSE:WMT) is not going to take the decision to switch providers lightly, and any transition is going to be highly disruptive to operations.

At the same time, Teradata is trying to improve its offerings and expand its addressable markets. While the move into midmarket appliances has some worrying about cannibalizing high-end offerings, I think it's a different market altogether and may serve to actually introduce and segue customers to higher-end products. Elsewhere, the company has tucked in acquisitions like Aster Data and Aprimo to improve its offerings.

The Bottom Line
These shares have been exceptionally strong and it's pretty evident that Wall Street is on to this story. Teradata may well have a durable edge on the high end of Big Data, but it's already on the high end of valuation as well.

Teradata is going to have to grow its free cash flow at an average clip of 15% or better over the next decade, if these shares are to be meaningfully undervalued today. That's a fairly excessive expectation, though I completely acknowledge that the market will likely continue to give these shares a generous valuation so long as the revenue growth stays strong. At today's prices, though, I think there are better values to be found in rivals like EMC, Microsoft and Oracle, than Teradata.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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