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May, 2016 2:25 AM



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Investing Opportunities from the Internet of Things

Investing Opportunities from the Internet of Things

By Bob Kohut 22.02.2016


It was 2010 when San Francisco entrepreneurs launched a revolutionary ride-sharing service called Uber. Today Uber’s is reportedly worth more than $50 billion dollars.  At its core Uber is nothing more than a smartphone application, or “app”, that connects riders with drivers and manages the billing process seamlessly.  

Ten years ago who would have dreamed this disruption in transportation was possible? The explosion in the growth of applications began with the arrival of a smartphone that opened the door to Internet usage beyond basic communication. The device was the iPhone, introduced on 29 June 2007.  By 2008 Internet users were flocking to “app stores” in search of innovative application software ranging from entertainment to personal and business productivity.

Truly, the smartphone and the thousands of apps it spawned qualify as a “big thing” in technology that changed the way we live and work.  What’s next?

Finding stocks of companies behind a “next big thing” in technology can reap handsome rewards for investors. One candidate that has been bandied about by technology prognosticators in recent years is the “Internet of Things”.

The term first appeared in 1999 as the title of a presentation made by MIT’s (Massachusetts Institute of Technology) Executive Director of the University’s Auto-Id lab and is now also referenced as the Internet of Everything.  As is the case with most things in tech, acronyms for the terms quickly followed – IoT and IoE. Here is how multinational networking equipment company Cisco Systems (NASDAQ:CSCO) defines the term.

The Internet of Everything (IoE) brings together people, process, data, and things to make networked connections more relevant and valuable than ever before-turning information into actions that create new capabilities, richer experiences, and unprecedented economic opportunity for businesses, individuals, and countries.

The definition may be a bit amorphous for retail investors so let’s look at the concept from a more practical perspective.  

The early Internet years were all about people connecting with people.  Email and online chat rooms and forums are examples.

Next came people connecting with “things” such as online stock quotation websites and online stock trading platforms.  The next phase – things connecting with things – is already here and growing.

In Australia QBE Insurance (QBE) offers its customers a “thing” called an Insurance Box.  The Box is a sophisticated digital monitoring device the user plugs into a port in a late model vehicle.  The Box monitors and transmits data such as how fast or slow you typically drive, how much and when you drive, how often you are braking your vehicle, how fast you accelerate, and how much night driving you do.  The data goes to another “thing” that analyses the information and determines your insurance premium based not on how you have driven your car in the past as has historically been the basis for insurance premiums, but on how you are driving right now.

The application potential here is enormous as literally everything that can be turned on and off can be monitored and connected to the Internet.  Right now users can monitor their homes with smart devices installed in the home.  This is a classic “people” to “thing” connection waiting to evolve to the next level where a smartphone app will monitor your home devices and make changes according to your pre-programmed instructions.  Too busy to check and turn up the air-conditioning?  The connected system will do it for you without any intervention on your part.

At the consumer level the IoT is made possible by smartphones and what we now know as wearable technology. Connecting via a smartphone is now augmented by connecting with a variety of other wearable devices with more to come. The following graph shows the expected growth in the retail market for these wearable devices.

Business application possibilities are also set to utilize IoT systems. Imagine monitoring devices on commercial and military aircraft whose sensors collect and transmit data enabling more immediate preventive maintenance. Imagine the retail checkouts where customers simply walk through a sensing device that reads scanning labels from products, sends the information to an automated pay system to effortlessly complete the transaction. Enterprise IoT connections are forecasted to more than quadruple by 2020.  Here is the graph.

As is the case with the rise of Uber, it is hard to imagine all the disruptive possibilities from connecting everything to the Internet.  At the consumer level, the linchpin underlying the technology is the monitoring and sensing device.  Right now we have wearable watches and wristbands, glasses, smartphone apps, and in the future you can anticipate smart monitors embedded in clothing. 

Currently ASX investors have two IoT related stocks from which to choose.  The first and oldest is TZ Limited (TZL), a B2B provider of smart systems for courier package delivery and pickup and other business applications. The second is Catapult Group (CAT) a niche player providing athletic monitoring systems for professional athletes.

A third player is awaiting ASX approval of its reverse listing and should begin trading shortly.  The company was formed in May 2015 through a merger of three separate tech businesses -- OK Watch, Roam Wearables, and InnovativePTV. The new company is called IoT Group.  

As opposed to the two existing entries, IoT Group focuses squarely on the much larger consumer market. The company already has a smartwatch, the Viper, on the shelves of Coles’ stores for $99.00, a price far below competitive products.  IoT Group management states the company will follow a “Good, Better, Best” business model, leaving the market segment interested in the “Best” to companies like Apple and Samsung, focusing instead on the “Better Segment” with product offerings ranging from $99 to $300.

Management reported the market test of the Viper at 82 targeted Coles stores sold out quickly.  The company plans to introduce its next generation in all Coles stores with Woolworths getting ready to offer IoT smartphones at mobile kiosks in its stores.

IoT Group has an impressive list of products under development including a safety smartwatch for children and a waterproof Trademaster smartwatch for on the job use.  Home automation suites are coming, including an internet doorbell, allowing users to answer the door from a remote smart device.  Perhaps the most intriguing product in the pipeline is a drone designed to take “selfies” of its users from a distance of up to 25 metres.  

While this company’s prospects seem limitless, investors who have done their homework know competition in the field is fierce, a fact highlighted in the Business Risks Section of the IoT Group IPO Prospectus.  The offering price listed in the prospectus was $0.032.

Catapult Group (CAT) began trading on the ASX on 19 December of 2014 with a listing price of $0.59 per share and a first day closing price of $0.55. The shares closed at $2.37 on 18 February of 2016.

The company offers professional athletes a complete performance analytics system, comprising of a wearable device that monitors a wide range of performance measures both during games and practice sessions and submits the data to cloud-based software for analysis.

The analytics allows coaches to tailor training sessions to improve performance of all athletes based on the measures of the outstanding athletes.  The system also helps reduce the risk of injury by monitoring and analysing levels that can contribute to injuries as well as determining when an injured athlete is ready to resume competition.

Catapult states the system is for “elite” athletes, which may be a niche market, but a fairly large one considering the number of professional sports teams around the globe.  The company has had solid revenue growth but has yet to turn a profit.  Catapult has an impressive list of sports clients and glowing testimonials from professional coaches.

TZ Limited (TZL) has been designing and implementing smart systems since 2004.  The company’s Smart Locking Devices have been used in automotive, aerospace, military, and logistics applications.  The services this company offers are impressive, ranging from data center cabinet security, to smart lockers for package delivery and pickup, to airplane locking mechanisms and maintenance monitoring systems.  However, the stock price performance has been abysmal at best.  

On 31 May 2012 the TZ CEO stepped down following the news the company had lost out on a contract to supply smart parcel lockers, reportedly to Australia Post.  The share price fell more than 40%.  Here is a five year price performance chart for TZL.

The company has increased revenue every year for the last three years, rising from $2.9 million in FY 2013 to $15.1 million in FY 2015.  However, TZ has reported a loss in each of those years, although the losses have decreased in each year, dropping from a $23.9 million dollar loss in FY 2013 to a $6.4 million dollar loss in FY 2014.

TZL’s performance highlights perhaps the principal risk of this sector – competition.  Cisco Systems competes in this space with its own Smart Locker System that offers lockers that can be reconfigured by size when necessary.

Gartner Inc. (NYSE:IT) is one of the world’s largest Information Technology research and advisory companies. The company is forecasting a 30% increase in connected “things” between 2015 and 2016.  In 2016, they claim, 5.5 million new things will get connected every day. 

Gartner cites a “Nexus of Forces” that are driving the Internet of Things, including:

  • Mobile communications through the Internet;
  • Social networks;
  • Cloud computing; and
  • “Big Data”/Information analytics capabilities.

Although ASX investors would have to span the globe to find investing opportunities in all these fields, we do have companies that stand to benefit in some areas.  Some of the Telco’s are increasing their penetration in mobile commuting.  Next DC (NXT) and Macquarie Telecom (MAQ) are involved in cloud computing, and a recent start-up named Skyfii Limited (SKF) is partnering with Optus to offer Big Data analytic services to 21 shopping centre locations in the Westfield Group. 

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week's newsletter

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