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Alternative Data in Financial Analysis

Alternative Data in Financial Analysis

Analysis and investment go hand in hand. Before venturing into a stock, investors check data obtained by conducting a certain financial analysis and turn to alternative data sources to help them gain an edge over the broader market in situations when the strategies in place tend to pose higher risks.

Alternative data often act as a haven for investors, establishing their confidence in a more productive market. The guide below will provide everything for a better understanding of all that alternative data are about, and tell more about the types, sources, and obligations of alternative data in financial analysis.

Alternative Data Defined

Alternative data can simply be defined as an unconventional form of data used in financial analysis. Unlike the traditional methods of generating finance-related data like the earnings report, alternative data takes a more creative approach to be generated. In essence, alternative data are not generated by the analyzing company or brokers. As such, investors have to take extra steps and seek alternative data from non-traditional sources.

Alternative data get such a name because they do not come from the usual sources like company reports, earnings calls, or broker notes. Instead, it includes things like internet comments, weather predictions, satellite images, data from IoT sensors, employee benefits, and corporate jet movements. This kind of data might not be easy to find, however, it can help to gather extra information about companies on the stock market.

Types of Alternative Data

To help investors secure an edge over the broader market and help them fight competition while optimizing their chances of making more profits, alternative data provides them with essential information in unusual ways. This brings us to the types of alternative data, the classification below is based on different sources of obtaining them.

  • Transaction data. People’s buying and selling activities generate valuable data which can be dubbed as transaction data. This data served as a  key source of alternative data. While companies often make some transaction data public, it usually happens when required by law. However, there are alternative ways to obtain this data. This can be in the form of credit card transactions which help to monitor how much money stores make and how people pay their loans. This information can predict a store’s financial reports and show how people spend their money on non-essential items. Moreso, transaction data can also come through Point of Sale (POS) transactions which offer insights into sales, customer behavior, popular products, and preferred payment methods among different types of customers.
  • Web data. The diverse activities that happen on the website often serve as a core way to generate valuable data. Following quests for rigorous market insights, investors sometimes need to gather data on common web searches, web traffic, and demographics, including click-through rates. Notably, web data is often required when an investor is seeking to know the extent to which a product or website is popular.
  • Location data. This data can assist businesses in finding places where certain products are more popular. Real estate investors can also use it to spot areas with potential for development, considering factors like zoning rules and new infrastructure projects.
  • Satellite data. This is an expensive yet popular type of alternative data. As the name implies, this data is generated from satellites. Sometimes, satellite data can also be gathered from low-level drones. This type of data is used for many reasons. However, the primary use of satellite data is to provide information on the economic state of an area. This data is always available in the form of images which can later be processed into necessary information. Moreover, satellite data can also be used to track the disruption of supply chains, as well as metal production and storage.
  • Property data. This provides information about land or buildings including ownership, financial info like leases and mortgages, previous sales, and assessed value. It also covers specifics about the buildings, like size, rooms, HVAC, and materials used. Another key aspect is the property’s physical footprint, showing its actual dimensions. This can include info on separate units within a larger building, like apartments, stores in a mall, or offices in a business complex.
  • Social media data. The posts, comments, and reactions people make on social media platforms to news or product advertisements help to provide investors with valuable insights. These data help to provide information on the public sentiments surrounding new developments, press releases, or product launches. Social media data are often available in the form of text, images, and videos, which can then be utilized to extract information on popular trends and activities.

Generating Alternative Data

Alternative data is generated via various forms, each with its advantages and drawbacks. Data from sensors or individual actions are often affordable to obtain but usually require extensive processing to become useful. In contrast, data from business activities are easier to work with but tend to be more costly.

Furthermore, sensors like satellites and surveillance cameras gather location-based data, including weather conditions and images from different angles. They can also monitor factors like the number of people in a specific area. Everyday actions such as social media posts, product reviews, surveys, and app usage generate a wealth of alternative data that can be valuable for businesses and investors. Furthermore, company operations can unintentionally produce data, like transaction records and publicly available information on websites, which can be harnessed for insights.

Traditional Data vs Alternative Data

As mentioned earlier, alternative data encompass a wide range of information, including web and foot traffic, credit card transactions, social media data, supply chain details, and even weather reports. This sets them apart from traditional data sources, which are typically more limited.

When comparing alternative data to traditional data, several key criteria come into play:

  • Definition and sources. Alternative data are derived from unconventional sources, offering additional insights, while traditional data originates from established sources used for business and investment decisions. Alternative data include web traffic, social media sentiment, satellite imagery, credit and debit card transactions, IoT data, geolocation data, customer reviews and ratings, and data providers, among others. Traditional data comprise financial reports, SEC filings, market research data, press releases, and more.
  • Use. Alternative data is harnessed to gain a competitive edge, uncover hidden patterns, and predict future trends, whereas traditional data serves regular business operations, compliance, and standard reporting.
  • Accessibilityю Accessing alternative data can be challenging due to privacy laws, the need for specialized tools, and complex data procurement methods. In contrast, traditional data is readily available from company reports, regulatory bodies, market research firms, and more.

Role of Alternative Data in Financial Analysis

The role of alternative data in financial analysis is significant.

Firstly, alternative data come with time and resource efficiency. Collecting, cleaning, and analyzing data can be time-consuming and resource-intensive. A team of data experts can use alternative data to perform these tasks more efficiently, allowing the business to focus on its core functions.

Secondly, turning to alternative data can bring a competitive advantage and provide valuable insights and strategies that set the business apart from the competition.

However, alternative data come with complexity. Non-traditional data are often messy and come from diverse sources, demanding special skills to clean, process, standardize, and analyze effectively.

Bottom Line

Investors need to pay attention to alternative data. When we invest in stocks, we’re essentially betting on a company’s future earnings and growth. As such, having more knowledge is essential because it increases the likelihood of making informed investment decisions.

Using traditional data like financial statements is important for stock analysis, but it mainly looks at the past and might not give the full picture. To truly gain an advantage and enhance our chances of making profits, we need to go beyond traditional data. This is where using alternative data becomes valuable. When used correctly, data from non-traditional sources can provide a more comprehensive view of a company and its potential.

Alternative Data in Financial Analysis