Profiting from the Internet of Things

If you've ever used an ATM machine, pumped your own gas, paid for a bridge toll using E-ZPass, or had a gas meter read remotely, you've participated in the coming “internet of things.”

The first two versions of the internet connected five billion people and their social networks.  Internet 3.0 is about putting the physical world on the web.  As part of this trend, we’ll see more everyday objects communicating to each other through basic machine-to-machine (M2M) interactions.

According to the research firm Analysys Mason, approximately 2 billion M2M devices will be connected by 2021, up from 100 million in 2011. This represents a compound annual growth rate of 36%.

Whole industries are already changing as a result of this.  The possibilities are pretty remarkable…

Construction:  Every major home system and appliance could eventually be monitored and controlled on a cell phone (the new universal remote).

Transportation:  Car theft is already becoming a thing of the past.  When driverless vehicles are equipped with enough sensors, they might not even be susceptible to vandalism. Smart cities will make it easier to find available parking spaces and redirect traffic based on congestion. 

Car ownership goes away – people will get automatically billed for type and amount of vehicle use.

Retail:  Networked price tags and touchless payment systems may mean the end of sales clerks.  Shopping eventually resembles shoplifting.

Manufacturing:  Supply chains can be managed to peak efficiency.   Predictive analytics may enable companies to anticipate changes in customer demand.  Inventories and warehouse space are all kept to a bare minimum.

M2M communications will make things smarter. We are coming closer to a world where nothing is lost, nothing is wasted, and nothing ever remains broken.  

Many tech-related companies stand to benefit.  Communications companies are going to see a rapid increase in network use – companies such as AT&T (T), Sprint (S), Verizon (VZ) and Rogers (RCI).  This is the most obvious (and possibly safest) play on the M2M trend.

You’ll also see new sources of revenue for traditional internet infrastructure companies such as Cisco (CSCO), Qualcomm (QCOM).  Hybrid hardware/service organizations such as Motorola Solutions (MSI), ADT (ADT), and Honeywell (HON) stand to benefit, too.

Cloud computing companies such as Google (GOOG), Amazon (AMZN), and Rackspace (RAX) will gain from surging demand for information storage and analytics.  Meanwhile, business customers will be asking large consultancies such as IBM (IBM), and Accenture (ACN) how to integrate M2M networks efficiently and cheaply into their businesses.

My favorite stocks in this space are the equipment suppliers.   Two companies that stand-out in terms of value and growth are CalAmp (CAMP) and Sierra Wireless (SWIR).  They are somewhat comparable – with similar market caps, earnings growth, and P/E multiples, but CalAmp seems to have an edge in terms of overall profitability.  Meanwhile, investors looking for international exposure might want to consider Gemalto (GTOMY), a French company with businesses in M2M, mobile communications, and secure transactions.

M2M is still not a household word.  (We’re just at the beginning of the next boom here.)

Meanwhile, there are some big challenges that remain:

1)     Lack of communications standards. There are many ways to send information on local wireless networks – RFID, NFC, Wi-Fi, Bluetooth, Zigbee, Z-Wave and Wireless M-Bus, just to name a few.  Too many options creates confusion and lack of compatibility.

2)     Bandwidth constraints.  There is limited space in the wireless spectrum that can be utilized.  This will eventually be overcome, but may create temporary bottlenecks.

3)     Closed networks.  Most existing M2M networks operate through an exclusive service provider and a single fee-paying customer.   Over time, it would be reasonable to expect that these networks will become much more open, like the internet itself.

And a few things to watch…

1)     People will eventually be on the “internet of things”, too.  We’ll see in increase in wirelessly networked health-monitoring applications, including glucose and heart monitors.

2)     Batteries not required. M2M devices will use ambient sources of energy to provide their own power.  Some medical sensors, for example, can be powered by the body’s own electrical field.

3)     Abundance.  The "internet of things" means that all resources will be used more intelligently.   This enables everyone to do more with less.

Will it all eventually get out of control?   Absolutely.  Would love to talk about this, but I gotta go – my refrigerator is texting me.

(Disclosure: Information contained herein is for educational purposes only and is not to be considered a recommendation to buy or sell any security or investment advice. Mr. Lee is the Founder of Strategic Foresight Investments, a registered investment advisor.  The author owns shares of CalAmp as of April 2, 2013)