Interactive Investor

The firms set to lead the "internet of things" revolution

19th August 2014 09:59

David Prosser from interactive investor

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If there were an award for the most anachronistic company name on the stockmarket, Carphone Warehouse would surely win it: car phones, after all, disappeared around the same time as shoulder pads.

It's curious, then, that the name will endure following the company's recommended merger of equals with Dixons Retail - particularly since Dixons Carphone (DC.), as the new venture will be known, is essentially a huge bet on a vision of how the internet will develop.

Dixons and Carphone reason that by bringing their consumer electricals and mobile technologies businesses together, they'll be uniquely well-placed to capitalise on demand for the growing number of products and services that straddle the two sectors.

To find out which listed companies and investment funds David Prosser thinks represent a direct play on this revolution, read: Six stocks and funds to connect with the internet of things.

Connected homes

They hope to cash in as customers begin to see the potential for the "connected home" - a home in which you can communicate online with all your appliances and devices from wherever you happen to be.

The idea is that the next big digital development will be the "internet of things" - that is, a world in which everyday objects contain technology that connects them online. That might include, for example, a fridge that adds milk to your online groceries shopping basket when you run out.

It might be a car that feeds back information to your insurance company on how and where you're driving. Or it could be a wearable fitness device that constantly tracks how you're eating, exercising and sleeping.

Businesses and consumers are increasingly connected to the internet and we will continue to see this proliferate into our daily lives"Jeremy Gleeson

Some of these applications are already in use: it's simple enough to use your phone to ask your set-top box to record Eastenders, say. But we have only scratched the surface - such applications go beyond the home, with connected devices now to be found everywhere from factories to farmyards.

The bottom line, according to Jeremy Gleeson, manager of the Axa Framlington Global Technology fund, is that "businesses and consumers are increasingly connected to the internet and we will continue to see this proliferate into our daily lives".

At Polar Capital Technology trust, manager Ben Rogoff agrees. "We're hugely excited about the internet of things as a theme. Effectively it's the front end of big data; as all these devices collect vast amounts of data, we can fundamentally change human understanding," he says.

But he also has a warning. "The bad news is that right now, there is no internet of things. We're at a very early stage and it's more like the internet of some things."

But Carphone and Dixons are far from the only companies to see this as a trend that could prove hugely rewarding. Google, for example, has already made a huge investment in the internet of things: earlier this year, it paid £3.2 billion for Nest Labs, a US start-up that has won plaudits for its smart thermostats and smoke alarms, and is developing connected home security devices such as door locks that can be switched on or off with a smartphone.

Frank Gillett, an analyst at technology research specialist Forrester, says the price paid by Google reflects the fact it is in a battle with other technology giants to corner this niche. "This is about whose service - Google, Amazon, Apple, Microsoft and others - is going to co-ordinate your smart home for you," he argues.

Killer technologies

At this level, the race is to be the company that provides the single, unified system through which people will access the internet of things - rather than, say, having to use a different app for each aspect of the connected home. Equally, however, companies are racing to provide the killer technologies powering all these devices, whether in security, energy, entertainment, communications or healthcare.

In totality, the scale of the opportunity is massive. Cisco Systems, the giant technology company, says there will be 25 billion devices around the world connected to the internet by next year - and 50 billion by 2020.

By then the market will be worth $19 trillion, says Kip Compton, a senior vice president at the company. "We think the internet of everything is the biggest transition for the internet since the birth of the internet," he says. "This is not about technology at all - it's about how it changes people's lives for ever."

In other words, argue evangelists for the connected home, this is one of those concepts with the potential to be a disruptive technology - an idea that goes beyond innovation and actually changes the market.

Though the phrase is often used, genuine examples of this phenomenon are rare and require vision as well as invention - the first ever car, for example, wasn't disruptive, but Henry Ford's mass production of the Model T Ford certainly was.

So how do investors capitalise on these trends? Well, there are undoubtedly opportunities to be found in small companies at the cutting edge of connected home technologies - either because of the rapid growth these businesses can generate or, more likely, because they'll be acquired by larger companies that want their expertise - just as Google bought Nest Labs.

Companies in every sector will benefit from falling costs as the internet commoditises the whole world"Elizabeth Savage

Unfortunately, such businesses are usually not publicly listed. At Forrester, Frank Gillett points to two particularly interesting examples. "SmartThings, in Virginia, is building a home hub to link together disparate smart products and connect them to its cloud service platform ," he says.

"Then at Withings, in France, chief executive Cédric Hutchings leads a team that has built software that interconnects with dozens of services for the results from their body scale, blood pressure cuff and activity monitor."

All sectors benefit

Neither company is investable, but their activities are indicative of the kind of applications analysts expect to become big business in the future.

In any case, while there are some listed companies, both small and large, that represent a direct play on the internet of things, the bigger opportunities may lie elsewhere. The thing with disruptive technologies is that it isn't necessarily the inventor who makes the money.

It may not even be a technology business that cashes in, says Elizabeth Savage, head of research at wealth manager Rathbones. "The nascent technological revolution will be so far-reaching that companies in every sector will benefit from falling costs as the internet commoditises the whole world and corporate structures change in response to the availability of services through the cloud," she argues. "The best way to play technology may be through non-technology companies."

At Fidelity Personal Investing, global equities portfolio manager Christopher Moore agrees with that analysis. He sees the potential plays as both horizontal - the companies powering the internet of things - and vertical, those benefiting from the applications created.

"We believe the opportunity in vertical sectors is much broader, owing to the greater diversity of potential industry applications, some of which are likely to be genuine gamechangers," he says.

Moore's examples include General Electric, which is investing in connected industrial devices, and Nike's Fuelband, a wristband with sensors that monitor the wearer's exercises. "The increase in intelligent connected devices has the potential to transform business practice across a wide range of industries," he concludes.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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