We live in a world where we are constantly tracked and supported by a global network of machines. Very few people appreciate how much we rely on these machines. But they are there – constantly communicating and adapting to our needs.
Consider what happens when you visit an airport. Ten years ago you would have walked up to the counter and presented your tickets to an airline rep. That person would have registered you in a computer and then spent ten minutes checking your luggage and notifying the flight that you’d arrived. All of this was done by hand.
But the last time you visited an airport, you probably went straight to a machine to check in. You entered your booking code or passport. And then something remarkable happened…
Just as soon as you’d booked, you started a huge conversation with machines right across the globe. Once your name is recognised, computers checked your flight status with other airlines, they checked your past travel history and they checked your security status with the authorities. This conversation happened across multiple servers that are talking to other servers that are talking to satellites gliding across space that in turn are talking to computers at your destination, who then check with passport control and your ongoing airlines. All of this takes seconds.
These advances are all possible because of the internet. And for most of us, we continue to think of the internet as a place where we communicate with other people. We think of how social media and email have brought about huge benefits in the way we communicate: from video calls with relatives in Australia to the instant sending and receipt of letters and documents.
But there is another class of user on the internet – machines. And the conversation that they are having is radically changing the way our economy operates.
This is what people talk about when they talk about the ‘internet of things’. And there is good reason to be excited about this story as an investment opportunity. Because not only has it changed the way we travel, it has also had a deeply disruptive change in retail, healthcare and logistics, to name just a few. According to McKinsey, this is a market that has the potential to create between $2.7trn and $6.3trn in value a year by 2025!
So today, I thought I’d take a look at the opportunity here. And I’ll point to two stocks that I’ve been following closely.
The next time you buy milk…
In the late 1990s, when the internet was getting mainstream adoption and was clearly going to be important, there was a lot of speculation about how it would change things. One of the more loopy-sounding forecasts I heard was that in the future, my fridge would be hooked up to the internet and would order milk automatically when it sensed we were running out. If ever a solution was to be invented for a problem that didn’t exist, this was surely it!
The technology to provide an ‘automated domestic milk-ordering solution’ now exists, even if we remain happy to buy our pints the old-fashioned way. Wireless internet communication, computer chips and sensors have become cheap enough and small enough to embed in lots of ‘things’. An example most of us will be familiar with is radio frequency identification (RFID) – commonly used to tag everything you buy in shops or supermarkets. When you buy an item from your local supermarket, the supplier can be notified and a replacement order logged with the distribution centre. A new carton of milk could be on the way by the time you’ve left the shop.
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Right across the globe, machinery, shipments and devices are being equipped with networked sensors that monitor your environment and report on their status to anyone interested. And so the internet of things provides a way of monitoring and optimising the performance of our complex global economy. It does this by analysing millions of data points in real time. And it allows technology to take over from people.
In healthcare for example, monitoring patients with chronic conditions in order to intervene at the first sign of trouble will save lives and an enormous amount of money. In the utility world, ‘smart grids’ will allow better management of supply and demand in real time – increasingly important in a world of ever higher energy costs and increasing supply shortages.
In fact, including computers and smartphones, over nine billion devices are connected to the internet, according to McKinsey. And this should mushroom over the next decade: estimates range from 50 billion to one trillion (Cisco). RFIDs are simple, cheap and tiny enough to be attached to anything. Much more sophisticated functions are now possible through ‘micro electro-mechanical systems’, which incorporate sensors and even actuators. They can be incorporated into utility grids, manufacturing production lines, and even human beings.
So how do we profit? Well, I wouldn’t recommend investing in the machines themselves. No matter how clever, electronic components tend to commoditise very quickly – profits get competed away. Manufacturers also have to reinvest what profits they make to keep up with technological advancements. It tends to be more rewarding to look for the writers of the software and systems, and the providers of monitoring services. Here’s one that I’ve been following…
One stock worth following
Telit uses the acronym ‘m2m’ (machine to machine) to describe the internet of things: machines wirelessly communicating with each other without human intervention. Many of these applications are becoming familiar. Smart meters and grids are helping to reduce energy use, providing real time monitoring of consumption both in the home and workplace. In healthcare, remotely monitored diabetes and heart patients are able to reduce their hospital visits by half.
Cars are increasingly connected – driving patterns of teenagers are monitored to help lower insurance premiums; smart parking and real time traffic information makes journeys more efficient; tolls are collected automatically. I had to admit to a pang of jealousy when travelling to a friend’s house a few months ago, they pulled out their smartphone en route to turn the heating up and switch the lights on so we would enjoy a more civilised arrival.
Telit’s hardware business, cellular communication modules, is expected to grow 13% a year which reflects 24% volume growth alongside falling prices. Falling prices will of course help drive wider adoption and new applications. In order to offset this deflation, though, Telit is developing value added services – providing connectivity and monitoring which bring in those valuable repeat revenues. It’s really helpful if a company can supply the service and not just the widget.
Monitoring, security and identification are major themes within the internet of things. There is often an uneasy sense of Big Brother watching us with many of these applications. It might take time for some of them to be accepted, while some might never be adopted – an example here being wheelie-bin monitoring, which Telit can offer to councils but households will not accept.
• This article is taken from our free twice-weekly small-cap investment email, The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in The Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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