What is alternative data and why does it matter for investing?

Alternative data refers to information gathered from non-traditional sources outside of regular financial statements and market data. This includes satellite imagery of retail parking lots, consumer spending patterns from credit card transactions, web traffic data, and social media sentiment. These data sources can provide early signals about company performance or market trends before they appear in official financial reports, potentially giving investors an informational advantage.

How do these companies make money from data?

Alternative data providers generate revenue through several business models. Some sell access to unique datasets through subscriptions or licensing agreements. Others build analytics platforms that transform raw data into actionable insights for specific industries. Some companies use proprietary data to power their own decision-making in areas like lending or insurance. Infrastructure providers in this group make money by offering the computing power and storage needed to process massive datasets.

What is the connection between AI and alternative data companies?

Artificial intelligence and alternative data have a symbiotic relationship. AI algorithms need vast amounts of diverse data to learn patterns and make predictions, creating demand for the datasets these companies provide. Simultaneously, these companies use AI to process and extract insights from enormous volumes of unstructured information like satellite images, text, or transaction records. As AI adoption grows across industries, the demand for high-quality alternative data increases, potentially benefiting companies in this group.

What risks should I be aware of when investing in alternative data providers?

Key risks include regulatory changes around data privacy (like GDPR in Europe), which could limit data collection or increase compliance costs. Competition is intense, with barriers to entry falling as technology advances. Data quality issues or security breaches can damage reputation and lead to customer loss. Additionally, as certain alternative datasets become widely available, their value in generating unique insights may diminish. Like all tech-oriented sectors, rapid technological change can quickly make existing products obsolete.

How might changing privacy regulations affect these companies?

Evolving privacy regulations could significantly impact alternative data providers. Stricter rules may limit what data can be collected, how it's processed, and how long it can be stored. Companies might face higher compliance costs and potentially lose access to valuable data sources. However, these challenges could also benefit established players with strong compliance frameworks and alternative data collection methods. The most resilient companies will likely be those that can adapt by focusing on anonymized data, developing synthetic datasets, or creating privacy-preserving analytics techniques.

15 handpicked stocks

Alternative Data Providers

Discover companies that collect and analyze unconventional data to create market advantages. These carefully selected stocks represent firms turning satellite imagery, web data, and consumer transactions into valuable insights that can lead to better investment decisions.

Han Tan | Market Analyst

Updated 2 days ago | Published at juin 17