A key structural theme this year has been to overweight global industrial capex/automation plays, in anticipation of a belated cyclical rebound in global factory investment, China's growing automation trend but also a new wave of connectivity which is adding previously 'dumb' standalone hardware to the Internet and will drive an upgrade cycle. The jargon and acronyms in this emerging tech cycle can be confusing, but the bottom line is that makers of sensors, smartphone components such as radio chips and batteries, electric motors and automation equipment are all in an investment sweet spot over the next few years as technologies from the consumer mobile and gaming sectors are embedded within the industrial and urban infrastructure.
There are a number of new technology cycles gaining momentum, but this one will probably have the widest economic and market impact. The so-called 'Internet of Things' isn't just about household appliances that can be remotely controlled, but a new generation of sensors and actuators embedded in physical objects from pipeline valves to factory machine tools that are for the first time networked.
These networks (of which Machine to Machine communication or M2M is an industrial/infrastructure subset of the IoT) then generate huge volumes of data for analysis and far more precise control of energy use, supply chain optimization etc. While investor/analyst focus has been excessively on smartphone sales to consumers, it's crucial to understand that the wireless 'ecosystem' is rapidly expanding to encompass physical objects, whether household durable goods or parts of the industrial infrastructure, and this new market will be a key driver of incremental revenue growth for mobile component manufacturers (and indeed network operators). The combination of advanced gyroscope/visual/temperature etc. sensors plus wireless technology to create an intelligent network with real time feedback will gradually have huge economic impact, ranging from productivity growth to corporate margins and trend unemployment rates as more functions are automated.
More than 9bn devices around the world are currently connected to the Internet, including PCs and smartphones but that number will explode, with over 12bn M2M devices alone connected by end decade and upwards of 180-200bn devices in total from gaming consoles to fridges, cars and personal healthcare monitoring devices will have some form of internet connection on IDC estimates. Only a small fraction of those will use existing 3/4G wireless rather than wide area fixed WiFi networks and various short-range communication technologies.
They will all need RF chips, MEMS based sensors etc. to function. Forecasts vary widely as to the market opportunity given a variety of regulatory and technology issues that need to be resolved (e.g. we will need far more IP addresses on the web) but with the cost of adding communications functionality to a device having tumbled sub $10, the classic tech 'J Curve' volume tipping point is in sight.
Stocks offering exposure to this theme via capex/actuators/motors are listed in the US and Japan predominantly and have outperformed strongly this year, including Nidec (NYSE:NJ), Murata, Cognex (NASDAQ:CGNX), and Advantech. MEMs sensor plays include Invensense (NYSE:INVN), Murata Manufacturing, Avago Technologies (NASDAQ:AVGO) and Triquint (NASDAQ:TQNT).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.