The Internet of Things - what it is, and how to invest in it

Some day soon everything may be connected to the internet...

By now you've probably at least heard of the Internet of Things (IoT).  The term has been thrown around like confetti at a wedding, and has been the subject of several Motley Fool newsletters trying to frighten investors into reading more by declaring that the internet is dead.  Now, I like The Motley Fool - I'm actually a subscriber to their entry-level newsletter - but the hyperbole of that particular headline is just Chicken Little talk.  The Internet of Things really is just the internetification (is that a word?  Anyone?  Bueller?  Bueller?) of, well, things.

Let's start over.

By now everyone sees the power of the internet.  It lets you connect people and information seamlessly - like you, dear reader, sitting in the comfort of your home - or daily commuter train - or anywhere, really - reading this blog page that I'm writing while sitting here in my man-cave in Columbus Ohio.  We're more connected than ever through the media of the internet, and I don't buy what people say about the dehumanization of the screens - we are communicating more directly and rapidly than ever before thanks to gadgets like the iPhone, iPad, and Android phones and tablets.

FitBit Flex - http://www.fitbit.com

At the same time, we are taking advantage of advances in miniaturization technology to start strapping these gadgets to our bodies - the Fitbit might be one of the most popular of these, the Apple Watch the most glamorous - but this entire class of wearable devices is only possible because we have gotten very good at making microchips (including CPUs and communications chips like WiFi, Bluetooth, and Near-Field Communications, or NFC chips) smaller - not to mention batteries, and most importantly, sensors, all of which are crammed by the dozen into that Fitbit, Apple Watch, or Android Wear you probably have strapped to your wrist.

It's the sensors and the communications chips that are the most interesting in terms of new technology, really.  One of the coolest things about the iPhone when it first came out was the motion-sensing capability - remember the on-stage demo of Trism, where the individual playing the game on the phone could rotate the phone and change the gameplay?  We now take that for granted as we tilt and pan out way through mazes and driving games, and of course consoles like the Playstation, X-Box, and Wii all have motion sensitive controllers.  These are all made possible by the development of one very special type of chip.  These tiny little chips are MEMS chips - Micro Electro Mechanical Systems - that are capable of detecting motion (or other environmental parameters) in any direction.  There are many companies producing these chips now, some with even more sensors all packed into the same chip - e.g. accelerometer, magnetometer, compass, gyroscope, pressure and/or barometric pressure, temperature, sound, image/video - you can't buy one chip with all of these, but you can buy a 9-axis (accelerometer, gyro, and compass) sensor from companies like Invensense (INVN) or ST Microelectronics (STM), and add individual sensor chips as needed for whatever project you need.  These sensors are what make iPhone/Android motion-sensing games work, as well as auto-stabilizing drones (even my inexpensive Syma X5SW drone - all of $60 - can be tossed in the air and automatically straighten itself out, orient itself to a selected direction, compensate for wind - all because of a single 9-axis sensor).  Add this to other specialty chips like GPS and Bluetooth, WiFi, or NFC, and you have a complete sensor platform that can fit into - well, something smaller than a smartphone.

Apple Watch - http://www.apple.com/watch

And companies are building these features into everything.  Gadgets like the higher-end Fitbit, Android Wear, and Apple Watch include motion sensors, pressure sensors, microphones, and pulse-rate sensors (to monitor your heart rate) - and will soon include cameras and potentially blood pressure monitors - even glucometers to measure blood sugar levels (vital if you are diabetic).  These sensors essentially turn your smart watch into a personal medical monitor - and one that monitors your vitals 24/7, something that could lead to a major revolution in healthcare, once we can take all of that data and predict trends and outcomes from it.

We'll talk more about the health care revolution in a later blog - right now, the important thing to note is that we can now pack more sensors into something the size of a watch, and make it less intrusive and more integrated into your life than ever before.  It's not hard to imagine that every device that matters in your life may soon be able to communicate to each other device.

Nest Thermometer - http://store.nest.com

You can already buy internet-enabled thermostats like the Nest, or smart lightbulbs that you can not just turn on or off from your smartphone, but even change the color profile on - want to set your lights to "office" mode?  No problem!  Flick one setting and you can change it to "casual" lighting - or boudoir lighting - all from the same bulb.  There are smart door locks that you can control and program remotely, smart doorbells that let you see who is at your door even when you aren't home, a smart grill monitor that lets you monitor the temperature of your grill and the meats you are grilling, and even a gadget that lets you use your voice to control all your gadgets, stream music, and even buy other gadgets (the Amazon Echo).

Right now most of these gadgets more or less live independently of one another, but soon, technology like Apple Home Kit will integrate your internet-enabled devices, iPhone, and AppleTV, allowing all of these pieces to speak to each other - and to you - in a unified and consistent fashion, unobtrusively and seamlessly integrating with your life. (ostensibly the Amazon Echo will allow you to do the same thing with your Android phone).  Your thermostat may sense that you are close to home (based on your phone GPS) and start warming the house up.  Your lights will come on as you enter the house, your security system will automatically disarm, the TV will turn on to the channel it knows you tend to watch at 7pm (this kind of relates to the neural network technology we talked about last week when I tried to convince you to buy NVIDIA stock).  The smart home is not that far away!

Withings WS-30.  http://www.withings.com

Here's another, real-world example.  About two weeks ago my scale sent me an email.  Yes, you read that correctly.  One of my Christmas presents this year was a Withings WS-30 internet-enabled scale.  After a brief and utterly painless setup process involving a quick bluetooth connection to my phone, the Withings WS-30 was connected to my home Wifi - borrowing the connection details from my phone.  Now, whenever I step on the scale, my weight is automatically sent to my phone over WiFi - no more bluetooth required.  The scale even shows me my progress, as well as the day's weather forecast!  The data seamlessly transfer to Apple Health as well - so all I have to remember to do is step on the scale every morning. Whenever I want a quick health report, I look at the Apple Health app, which already tracks my exercise, steps, pulse (thanks to my Apple Watch), and a plethora of other things.

But let's get back to that email.  I didn't even realize that the Withings WS-30 was going to send me progress reports, so I was stunned to see the email in my inbox.  Granted, the tone of the email could have been, well, kinder - but nevertheless, my scale was able to summarize data and send me a valuable progress report - all I had to do was to remember to step on the damn thing every now and then.

Car2Go Smart Cars

That's the key to making this sort of thing sell - it has to be seamlessly integrated into our lives.  Think about how car services like Uber and Car2Go have suddenly transformed the way we can get from point A to point B - we push a button on our smart phone and either a car either shows up (Uber) or we can unlock and start up the nearest Car2Go Smart Car (Car2Go) - you don't have to own a car or worry about parking it when you reach your destination, you just get from where you are to where you want to be and leave the hassle of parking, maintenance, fuel, and insurance to someone - or something - else.  That's seamless mobility, and it's part of the Internet of Things - even more so when Uber starts using Tesla's (TSLA) autonomous cars instead of human drivers in a few years.

Let's imagine another example that isn't really that far off.  You may know that RFID tags are already being used to tag pets and some high-end merchandise at some retailers.  What you may not know is that RFID tags may also soon show up on your grocery's shelves.  That would make checkout faster and smarter - imagine just pushing your cart through the checkout line, without actually having to remove the items and have them scanned - the RFID tags will automatically broadcast what you're purchasing to the register, and once you've paid the register will let you out of the store with your bounty (or Bounty).

But that's just the beginning.  When you get home, your SmartFridge will update the house manifest based your purchases - it'll always know what ingredients you have in stock.  When you run out of milk and throw the carton away, the RFID tag leaves the house - and the fridge then knows to add milk to your shopping list, which you'll undoubtedly access on your SmartPhone while at the grocery store.  This isn't really that far fetched - you can already buy internet-enabled refrigerators today; all that's missing is the RFID reader and a simple database/grocery list app that one of my 14-year-olds could probably write in python.

So how can we as investors make money off of this coming revolution in connectivity?  That's a great question.  Obviously we can't know for certain which companies will succeed and which will fail, but what we can do is look at the companies that are positioned to succeed - and that's likely to be not the companies making the actual gadgets, but the companies making the components that are required to make the gadgets - and they really fall into several categories:

MEMS chips manufacturers:

There are several manufacturers to look at in the MEMS arena - Invensense (INVN), Bosch (BOSCHLTD), Texas Instruments (TXN), and ST Microelectronics (STM) are probably the top players.  Of these, I like Invensense and ST Microelectronics - they have a good presence in items such as the iPhone and Apple Watch, and offer a diverse number of products that complete complete and ready to use - almost plug and play - for manufacturers such as Apple.  In addition they are affordable price right now - always a consideration if you're looking to optimize your price per share after commission.  Invensense in particular is a great choice; the price per share is pretty low right now, and their multi-sensor chips and software combos are very powerful and easy to adopt for hardware manufacturers.

SOC manufacturers:

The choices in this category are also pretty broad; I tend to keep my eye on the big players like Intel (INTC) and Samsung (because Samsung is listed on the Korean exchange it's difficult for us here in the States to purchase), but the companies I've invested in include Taiwan Semiconductor (TSM), and Invensense (INVN).  Arm Holdings (ARMH) is also a very tempting stock - they don't actually manufacture any hardware; rather, they design chip architectures, patent them, and then license those designs to other companies to use as the basis for their own designs, or to build outright - like Samsung, Qualcomm, and Apple.  In fact, Apple now designs all of it's own processors for every product it makes - except the actual Mac computers - using ARM architecture.  That means that Arm Holdings gets a slice of delicious royalty pie for every single iPhone, iPad, Apple TV, and Apple Watch that Apple sells.  The same goes, actually, for just about every SmartPhone out there - with a few exceptions they will all use ARM architecture somewhere.  It's important to note that Apple doesn't actually manufacture the chips they design; they usually farm that out to companies like Taiwan Semiconductor (who will be the exclusive manufacturer of the new A10 chip for the iPhone 7).

Communications chips manufacturers:

Again, many choices - Sierra Wireless (SWIR) is a popular choice amongst Internet of Things investors, as is Qualcomm (QCOM).  But you should also consider Nordic Semiconductor (NOD), whose low-power Bluetooth chips are among the finest, and Intel (INTC).  Of these, I like Sierra Wireless and Qualcomm, especially at today's prices.

One last thing for you to chew on - all of those Internet of Things gadgets will require power.  While many of them can easily be directed plugged into the grid, many of them need to be mobile, and you don't necessarily want to have to plug every gadget in your house into a charging station every day or two - it's bad enough we have to do that with our phones, Fitbits, and Apple Watches.  While wireless charging isn't new - the Apple Watch uses inductive charging; you just lay it on top of it's charging dongle and it powers up - the idea of long-range charging is starting to gather steam.  Pay close attention to Intel (INTC) and Qualcomm (QCOM) as potential leaders in this charge (heh, I see what I did there....) - and once a standard and/or leader emerges, jump on them with all your might.....

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Disclaimer - I am not a financial expert and I am not responsible for any losses - or gains - you may make if you make decisions based on the information posted here.  If you do make money, please feel free to let me know!

Disclosure - Wolfgang Rumpf owns shares in Apple (APPL), Invensense (INVN), ST Microelectronics (STM), Sierra Wireless (SWIR), NVIDIA (NVDA), Taiwan Semiconductor (TSM), and Qualcomm (QCOM), and plans on purchasing Intel (INTC), ARM Holdings (ARMH), and Tesla Motors (TSLA) stock within the next 12 months.