How to make money from talking toothbrushes and cloud computing

The Consumer Electronics Show (CES) is currently underway in Las Vegas. It’s arguably the most important event in the technology calendar, so I always try to keep an eye on what’s going on.

The theme I keep seeing this time round is internet connectivity. Rory Cellan Jones sums it up well on the BBC website: “Just about every new gadget at CES this year is either connected directly to the internet or talks to it via a smartphone.”

This is the ‘internet of things’ – where everything from your headphones to your toothbrush is online. By 2020, apparently, there could be 50 billion devices connected to the internet worldwide. That works out at six devices for every man, woman and child.

Today, even as a reasonably affluent Brit, I currently have only three ‘connected’ devices. So there’s clearly plenty of potential for growth here.

But how can you profit from it?

No, really – your toothbrush will be hooked up to the internet

When I said your toothbrush might be connected to the internet in the future, I wasn’t joking. ‘Connected’ toothbrushes, earphones and loads of other wearable devices are among the gadgets on display at this year’s Consumer Electronics Show. It also looks like cars will become more and more connected too.

As Cellan Jones says, “We’ve gone through an extraordinary revolution over the last five years, but sometimes when you’re in the middle of fundamental change it is hard to spot.”

In other words, we’re seeing the rapid development of the ‘internet of things’ where a wide range of objects and goods are linked to the web. The main point of all this connectivity is to collect and analyse data.

That data might be used to give us feedback to help improve our own performance (even at toothbrushing), or to give companies a better idea of what we might buy from them, or to help to automate lots of day to day jobs.

But how can you profit from this as an investor?

One company that could benefit is Intel (Nasdaq: INTC). A few years back, it was undoubtedly the world’s top chipmaker. However, the company didn’t respond fast enough to the rise of smartphones and tablets. As a result, there’s a perception that Intel will gradually but terminally decline as PC sales continue to fall.

I think that perception is probably wrong. Intel’s boss, Brian Krzanich, made it very clear at CES that he wants to have a strong position in the internet of things.

For example, lntel showed off its new Edison chip, a PC on a chip, which is designed to ape the success of the Raspberry Pi chip/computer. Among other things, this enables the more technically-minded to do clever things with their various gadgets – a bit like a kit computer.

Intel has also developed a smart watch, which, unlike most rivals, isn’t linked to a smartphone. So you can directly link from the watch to the web even if you don’t have a smartphone with you.

And best of all, because it’s an unpopular tech stock, the valuation doesn’t look too stretched. Intel is trading on a price/earnings ratio of 13 and has a dividend yield of 3.5%.

Amazon trades on a ridiculous valuation – but it might be worth buying

Sadly, most of the best US tech stocks aren’t available on such low p/e ratios. But that doesn’t mean you should write them all off as too expensive.

For example, Google (Nasdaq: GOOG) trades on a price/earnings ratio of 21. But as I’ve said before, its dominant position in web advertising means that’s not unreasonable. I’m happy to carry on holding my shares.

Amazon (Nasdaq: AMZN) is another favourite of mine. You may think of it as purely a web retailer, but it’s more than that. Yes, there’s huge potential for growth in internet retail, but the Amazon Web Services (AWS) business is just as important.

Traditionally, many businesses have used their own servers to house all the data that the business generates and needs. Housing and maintaining these servers has been a significant cost.

With AWS, a business doesn’t need to bother. It can transfer all its data to Amazon, which then stores it all on its own servers in the internet-based ‘cloud.’

The cloud offers a raft of other money-saving opportunities for businesses and AWS is well-placed to provide them. Granted, Amazon has several competitors in this area, notably Microsoft. But the company seems to have a strong position that it can probably defend successfully.

And as the ‘internet of things’ continues to grow, more and more data will be stored on the web, which can only be a good thing for Amazon.

Now, I’m a shareholder in Amazon, but I can’t deny that a p/e ratio of – wait for it – 1,400 (!) does make the company look very expensive indeed.

I can’t offer you any easy justification for that rating. I just comfort myself in the fact that Amazon has always traded on crazy-high ratings. Chief executive Jeff Bezos takes pretty much all the spare cash there is to hand and reinvests it in the business. And he’s done that very successfully so far.

Following this sort of strategy does greatly increase the risk for shareholders. But it’s a risk that I’m prepared to take – in a small dose, anyway.

As we head towards a world where we all have at least six internet-connected devices, there should be plenty more great opportunities for investors to make profits. We’ll be covering this in more detail soon in MoneyWeek magazine (if you’re not already a subscriber, subscribe to MoneyWeek magazine).

In the meantime, if you’re interested in cutting-edge technology, you should take a look at my colleague David Thornton’s report for his Red Hot Penny Shares newsletter – it’s all about some of the massive advances being made even now, and how you could profit from them.

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  • Leven

    The reason Amazon trades on a ‘crazy’ PE multiple is that Bezos understands that by breaking even they put eveyone else out of business because no one can compete on price

  • Ed Bowsher

    Hi Leven,

    Yes, you’re right, I should have talked about aggressive pricing. So it’s a combination of pricing and investment.