By: Nancy Zambell
Editor of Investment Digest and Dividend Digest
The Next Disruptive Technology
How to Make Money in the Coming Technology Boom
Internet of Things (IoT) Stock Pick
“Disruptive” technologies—products and services that create new markets and also disrupt existing markets—are not new. You use them daily. The telephone disrupted the telegraph industry; trains replaced the Conestoga wagon; and automobiles, in turn, decimated travel by rail.
But nowhere have disruptive innovations had as much impact as in the technology industry.
Mainframes gave way to personal computers, allowing complex operations to be performed on machines that could be held in your lap, spawning a brand new market that is estimated to grow to two billion computers this year. Cell phones, iPods, iPads, cable TV, satellite operators and Netflix have radically changed the way we communicate and seek entertainment, giving traditional telephone companies, movie theaters and network TV stations a run for their money. Long-lasting efficient batteries are making electric cars competitive with gas-guzzling engines, providing hope for oil independency, environmental benefits and a whole new marketplace for suppliers to that industry.
Those are tremendous achievements. But, as Bachman-Turner Overdrive sang, “You Ain’t Seen Nothing Yet”!
“Hal” is a Reality
You’ll recall Hal, the scary, too-smart computer in 2001: A Space Odyssey. Guess what? We’re there. Watson, a computer built by IBM already showed the world it can be done when he defeated Ken Jennings, Jeopardy’s most-winning player. And now we are on the cusp of an amazing disruptive advancement in intelligent computing. It’s called the Internet of Things (IoT) and its abilities are far-reaching and surreal.
British technology pioneer Kevin Ashton—a cofounder of the Auto-ID Center at the Massachusetts Institute of Technology (MIT)—coined the term in 1999, to describe a system using sensors that would connect the Internet to the physical world.
Ashton and his program created the global standards system for radio frequency identification (RFID), a precursor to IoT, which was the first device-to-device communication, allowing data to be transferred between a product ID tag and a computerized inventory system. RFID transformed the retail industry, and is widely credited as the number one reason that mega-retailer Wal-Mart left Kmart in its dust.
But now, technology has advanced far beyond devices merely “talking” with each other, to a point of actually communicating intelligently.
Think about it. Every device we use is constantly churning data—data in and data out.
We already input data to program applications that make our lives easier. Our smart houses can be instructed to turn the lights and heat on before we pull up to our driveways. We can program the speed of our autos with cruise control and map out a route anywhere in the U.S. And our computers can calculate complex problems while we sleep.
But IoT takes this concept much further. We’re drowning in big data. According to IMS Research, by 2020, it is forecast that up to 22 billion embedded systems and other portable devices will be connected to the Internet, shooting out more than 2.5 quintillion bytes of new data daily. And, until recently, most of that data was just collected, and not really used for much, excepting programming for fairly simple functions.
The advent of sensors with ever-shrinking semiconductor chips and warp-speed processing abilities now allows us to not only input the data for a specific output, but goes many steps further. We can now quickly process these enormous amounts of data, program and feed that output into other devices, combining their brainpower to create a host of very interesting applications.
IoT is on the verge of using this connectivity of devices to create what IBM deems “a central nervous system” for the planet. Advanced analytics now provide a path to turn all that data into intelligent, intuitive insight, and in real time. Utilizing a “triangle” called DIKW—data, information, knowledge, and wisdom, IoT’s mission is to apply intelligence to the data output; transform the information to knowledge, and then use that knowledge to gain wisdom.
I’ve read about some fascinating applications. Imagine noting an appointment in your electronic calendar, your alarm clock takes into account how long it takes you to rise and shine, then automatically sets your wake-up time. Or your outside thermometer registers freezing temperatures, so your furnace comes on to preheat your bathroom floor tiles, and then tells your alarm to awaken you a few minutes earlier than normal so you can scrape the ice from your car windows. How about a refrigerator that can tell you when your milk is running low? And even more far-fetched, a technology that allows your eyes to work as a computer mouse, simply by their movement!
On a commercial basis, there have already been many advancements. In Stockholm, Sweden, the city has reduced gridlock by 20% and harmful emissions by 12%, by using smart traffic systems to reroute heavy traffic as needed. In the U.S., it’s estimated that congested roadways cost $78 billion annually due to 2.9 billion gallons of wasted gas and 4.2 billion lost work hours. Using smart grids would save taxpayers enormous amounts of money.
RFID technology is being utilized in smart food systems to keep track of the distribution of meat and poultry—all the way from the range to the end retailer. That makes the handling of contamination and recalls much faster, less costly and ultimately, safer for the consumer.
It’s been said that for every four text messages sent while you are walking down a sidewalk, that roadway next to you is transmitting just as much data—sending out the positions of taxis, buses, trains and trucks; monitoring the water and electrical flows in that sector; and regulating traffic signals. All that information put into a smart network could make transportation and basic utilities incredibly more efficient.
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How to Make Money in IoT
The innovations are coming fast and furiously. The applications are almost infinite. And there are many companies already ramping up IoT. Technology patent wars abound. Of the large companies, Google (GOOG), Apple (AAPL) and InterDigital (IDCC) have all filed numerous patents for IoT technologies. And there are plenty of startups who have done the same. The inevitable outcome will be weighted toward the big players, but don’t count out the little ones—some of whom will be scarfed up by the big guys.
But remember the VHS/Betamax wars, where competing technologies vied for King of the Hill. VHS was the champion, and Betamax fell by the wayside. Competing video gaming machine makers have fared better, with both Sony and Microsoft coming out winners. In IoT, the jury is far from reaching a decision. So your guess as to who goes and who stays is as good as mine.
IBM’s Next Round
That’s why I prefer to focus on a company that’s keeping an “open” mind. The company is certainly not an unknown. International Business Machines (IBM) is more than a century old, and has survived by constantly innovating, and changing with the times. Its path has not always been pretty, and paraphrasing Mark Twain, “the reports of its death have been greatly exaggerated” a time or two. But IBM has managed to keep going strong and profitably throughout many business cycles.
IBM has been an early player in IoT. Rather than creating a plethora of patent-protected technologies, the company decided to be an open-source provider. IBM has collaborated with other companies to create IoT architecture and protocols that can be easily adopted by millions of users and devices—opening up tremendous opportunities in machine-to-machine (M2M) communication. This project is receiving funds from the European Union, and consortium partners including Siemens, NEC, Hitachi and Alcatel-Lucent.
Here are some of its recent innovations:
• A do-it-yourself kit from IBM and hardware provider Libelium for testing and deploying sensor networks to collect weather, temperature, carbon dioxide, motion and light data in a wireless environment.
• MessageSight appliance, built to process more than 13 million messages per second, and route them to other locations. It was designed specifically to work with the IoT to relay information on the operation of many types of products, including automobiles.
• Worklight, used to build cross-platform mobile applications. It reports back information such as how users are deploying the software, incorporates geolocation features in their apps, and links their apps with the Apple Passbook mobile payment system.
• Node-RED, a visual interface tool developed to help wire the IoT. IBM describes it like this: “The basic idea is to program the Internet of Things much like you play a Sims-style video game—you set things up to perform in a way you think will work and then see what happens. Instead of programming an action, you’re programming behaviors and trends in a device or class of devices. Then you put them together, give them a direction and they figure out how to get there.”
I think IBM is going to be the company to beat in IoT. Of course, there are plenty of other reasons to like the company—rising earnings, double-digit growth rates, a 2% dividend yield, and a share price that is in a very buyable range.
But it is the company’s foray into big data, the Cloud and IoT that is commanding my attention. IBM is forecasting that big data will generate revenues of $20 billion by 2015, with some 25% of its revenues coming from the big data and cloud business. And the company has said it expects its cloud business to generate $7 billion for fiscal year 2013.
As for IoT, that product line will grow from applications in its big data segment. And, as with most stocks, it’s the anticipation that provides the momentum. Trading at 186 and change, I think these shares could easily go to 250.
Right now, the shares are trading below their 200-day moving average—a good time to buy in. As IoT becomes a word for the masses, expect some good momentum out of this stock.
Editor of Investment Digest and Dividend Digest
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