The Internet of Things (IoT) is one of those terms you must have heard of. As with many other terms going around, it is a bit hard to understand. I'm sure you can grasp the idea that, eventually, all of the "things" around you will be connected to the Internet and will be able to communicate with other "things" and, of course, with you. From an investing point of view, one has to realize which company will benefit the most from a certain trend, and to do so, one needs to unfold the trend and understand exactly what is causing the rapid growth and what products/services sales are growing. So let's start.
What Is the Internet of Things?
IoT is an abbreviation for a term referring to the connection of virtually almost any object in the physical world to the Internet. What kind of objects? This graphic gives an overview.
Source: Beecham Research
- Buildings/Smart Buildings - HVAC (heating, ventilation, and air conditioning), lighting management, access control, fire and safety systems.
- Energy - smart meters, fuel cells, generators, windmills, solar panels, batteries, turbines.
- Consumer/Home - home energy management, home security, fire alarms, elderly and children monitoring, climate control, appliances, entertainment devices.
- Healthcare & Life Sciences - surgical equipment, patient monitoring, implants (pacemakers), telemedicine, lab equipment.
- Industrial - production machinery, agriculture, irrigation, mining, warehouse management, factory management.
- Transportation - fleet management, self-navigation, driverless-cars, vehicle diagnostics, in-vehicle entertainment.
- Retail - cash registers, vending machines, POS terminals (point-of-sale terminals), signs.
- Security & Public Safety - emergency services, military weapons and equipment, surveillance, public infrastructure (monitoring water quality, climate monitoring).
- IT & Networks - enterprise networks, public networks.
As you can see, the applications are endless. It is clear why the world is going in this direction. The connection of things to the Internet lets you monitor and control them remotely. We, as consumers, are drawn to the consumer/home segments because this is the closest segment to us, but the applications go a lot further than controlling your AC through your smartphone, getting a report that your dishwasher is broken, or that somebody is trying to break into your house. A doctor can be notified when a patient's pacemaker is starting to fail. A country's government can detect pollution in their water reservoirs in real time. Maybe in a few years you might be able to send your driverless car to the garage for repairs, in the middle of your workday.
The possibilities are limited only by our imagination. But what does a connected device actually require to operate?
- Computing Power - some level of computing power to perform the tasks we want a certain device to perform.
- Sensors - a suitable sensor to sense the environmental context of the device. For example, a water treatment facility will be able to "sense" a change in the water quality.
- Connectivity - Of course, all of that will mean nothing without transmitting the data to another machine/human being. Basically, there are two ways of connecting a device to the Internet, a Wi-Fi connection or a cellular network connection.
Google and Intel Are Pushing Forward
This IoT trend seemed to be stuck for a few years. I believe one of the reasons for this was, on the one hand, the lack of infrastructure, and, on the other, the lack of technical tools to make a connected device. This resulted in the lack of applications. I think that recently an industry titan, Intel (INTC), placed a huge vote of confidence in this trend. More than that, it actually started to create the trend itself. At CES 2014, Intel presented the Edison.
(click to enlarge)
Source: Intel Website.
At CES, Intel demonstrated the concept of embedding the Edison in objects, thus making them smart. You can watch a video here demonstrating a smart baby cradle. I believe that with Intel offering the Edison starting in the middle of this year, we will start seeing more and more applications of the IoT trend.
Google (GOOG) seems to look at the downstream side of the market. Google just announced the acquisition of Nest, a smart home company, for $3.2B. In my view, this is a very big vote of confidence of Google in the IoT. Now that Google is standing behind the smart home segment of the market, I believe we will see more applications for the consumer side of the IoT market very soon.
With these two titans pushing the IoT trend, the realization of this forecast is close. I believe that at one point in the near future, almost no manufacturer that makes a product that can benefit from being connected to the Internet (see above for market segments), will be able to afford not to include an IoT feature. The very low cost of doing so, the added value to the customer, and the necessity to compete in the relevant markets will drive manufacturers to do so.
The IoT market is expected to reach unheard of numbers. According to BI Intelligence, by 2018 there will be 9 billion IoT devices (up from almost 2B today). This will roughly equal the number of smartphones, smart TVs, tablets, wearable computers, and PCs. Combined.
(click to enlarge)
In contrast, Gartner thinks that the IoT will reach 26B devices by 2020. Gartner believes that one of the drivers of this growth will be the falling cost of adding an IoT capability to a product.
IDC thinks there will be 30.1B IoT devices by 2020.
Cisco (CSCO) thinks there will be 50.1B devices (any device connected to the Internet, not just IoT devices) connected by 2020. The next slide shows the number of things connected to the Internet annually through 2020.
(click to enlarge)
How to Profit?
As investors, we want to profit from trends. The way of doing so is finding companies that are both benefiting from the impressive growth rates as well as structured in a way such that the impact of the trend is having a great effect on the company's operation and financials. In this article, I have chosen to outline two companies that will benefit from the connectivity side of the IoT market.
Sierra Wireless (SWIR)
Sierra Wireless has just transformed into a pure play M2M service provider. After selling the AirCard division and acquiring AnyData M2M business, I believe Sierra Wireless's current operation is positioned to greatly benefit from the IoT trend. Sierra Wireless is making M2M connectivity products. That means it is exposed to the connectivity side of the IoT market. Although the Intel Edison has a built-in Wi-Fi connectivity, plenty of IoT devices will be deployed in outdoor, remote places or in applications that are mobile and constantly moving (cars). These devices will have to be connected to the Internet via a cellular network connection. Sierra Wireless makes wireless embedded cards or complete modules that enable a product to be connected to the Internet through any of the existing cellular networks (2G, 3G, LTE, etc.).
Ubiquity Networks (UBNT)
Ubiquity Networks had a fantastic 2013. The company solved a counterfeiting issue of its products by Chinese counterfeiters. Now that this problem is behind the company, it is ready to benefit from the IoT trend, as the company offers indoors Wi-Fi for enterprises and outdoor Wi-Fi for cellular backhauling. IoT devices need to communicate with the Internet through Wi-Fi modules. Ubiquity offers complete Wi-Fi solutions to enterprises as well as cellular carriers wishing to utilize Wi-Fi as a method of answering the exploding mobile data usage in cities (small cells). As the IoT eco-system evolves, demand for enterprise-scale Wi-Fi should explode. Every building will become a smart building, and every city will become a smart city. Therefore, at least in the Western world, Wi-Fi will be deployed virtually everywhere. According to Infonetics Research, the use of Wi-Fi by cellular carriers for data offload is expected to reach $3.9B in 2017, up from ~$700M in 2013. According to Gartner, in Q3-2013, Ubiquity was the second-largest supplier in the world for enterprise Wi-Fi access points. More than that, Ubiquity's unique operational structure enables the company to offer a very compelling cost-performance advantage over other products in the market, where it competes against Cisco and Rukus (RKUS).
I believe that after investors understand the components that make up the IoT market (CPU power, connectivity, and sensors), they can sift the market for the right companies. On the connectivity side, I believe that both of the above companies are positioned to benefit from the IoT trend, and both, in my opinion, are excellently run companies. The IoT world is coming. Just to remind you, the mobile revolution changed our world beyond recognition in a period of just over six to seven years. Our world keeps changing and the frequency of these changes is rapidly accelerating. If you keep trying to find and identify the trends and related companies, you might be able to get an edge over the wolves of Wall St.
The Intel Edison is a Quark-based computer, housed in an SD form factor. The tiny computer package includes (besides the Quark processor) some NAND flash storage, some LPDDR2 DRAM memory, and Wi-Fi and Bluetooth connectivity. This device is meant to enable rapid innovation and product development. Intel CEO, Brian Krzanich, has made it clear that Intel will not miss the next trend, as it did with the emergence of smartphones. When Intel missed the mobile revolution led by Apple (AAPL) back in 2007, Apple had the resources to design and develop a mobile processor in-house. This is largely because Apple was already a computer company and had the infrastructure to do so. The IoT trend is different: the connected devices, the numbers of which are expected to explode by the end of the decade, are generally "stupid" devices, such as air conditioning systems, baby cradles, an office building climate control system. None of these products are made by companies that have any in-house ability to develop their own processors so they will be able to offer a true IoT device. I think that Intel perfectly understands that, and that is the driving force behind the introduction of Edison a week ago.