The internet of things has fully entered into the mainstream, but it isn’t a single sector getting ready to lift off in a single year, or even in a few years. Instead it will move at different speeds in different industries over the next few decades as the cost of connectivity continues to drop.
“The number of Internet-connected devices surpassed the number of human beings on the planet in 2011, and by 2020, Internet-connected devices are expected to number between 26 billion and 50 billion,” writes a recent Raymond James report on the internet of things. “For every Internet-connected PC or handset there will be 5-10 other types of devices sold with native Internet connectivity. These will include all manner of consumer electronics, machine tools, industrial equipment, cars, appliances, and a number of devices likely not yet invented.”
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Value from connectivity at $613 billion and rising
Adding value through connectivity certainly isn’t a new phenomenon. Trucking companies have been using satellites to keep track of trucks since the 1980s, justifying the cost with more efficient logistics and better end user experiences. What’s new is that the cost of making something part of the network (including network adapters, sensors, and other inputs) has been falling for decades. At this point, even relatively simple devices are can be a part of your home network (Google Inc (NASDAQ:GOOG) recently bought a company that produces connected thermostats). As the cost of connecting consumer electronics and other goods becomes quite low, even a small amount of marginal utility can justify the cost.
But the total impact on industries is anything but small. Cisco Systems, Inc. (NASDAQ:CSCO) estimates that businesses earn an additional $613 billion per year by connecting devices to the internet, and that this amount can be at least doubled. “These additional profits from connecting everything to the Internet are roughly equally distributed between increased asset utilization, increased employee productivity, better logistics management, better customer experiences, and increased R&D productivity,” says the Raymond James report.
Internet of things as an investment idea
Using the internet of things as an investment idea is tricky. First, not every industry has the same time frame. “As far as we can tell, there is no magical horizontal software app that allows every industry to attach a cellular or Wi-Fi module to all of its assets and get immediate ROI (or if there is, please let us know as we’d like to invest),” says the Raymond James report.
Raymond James argues that home automation, connected cars, and wearable devices are the most interesting in the near term, but you still have to decide where in the value chain to invest. Taking the home automation market as an example, the luxury market has been in place for years, at least since the late 90s tech bubble, but the mainstream retail market and managed services market are taking off. Lots of companies could increase your exposure to this market, but that doesn’t mean they are all strong investment (Best Buy, for example, has had lots of problems recently).
Instead, it probably makes more sense to understand the role that cheaper connectivity plays in each company’s business plan so that it can be incorporated in your overall understanding of that stock.