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A member of the audience uses an iPhone to record DJ Afrojack's performance on ABC network's Good Morning America program in New York June 27, 2014. (LUCAS JACKSON/REUTERS)
A member of the audience uses an iPhone to record DJ Afrojack's performance on ABC network's Good Morning America program in New York June 27, 2014. (LUCAS JACKSON/REUTERS)

STRATEGY LAB

‘The Internet of Things’: Google, Apple and the next big growth cycle Add to ...

Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

Ever since Apple Inc. released the first iPhone in 2007, the smartphone sector, previously dominated by BlackBerry, exploded to a whole new level of growth. Today the two market leaders, Apple and Google Inc., control the two most popular mobile operating systems, iOS and Android. There is still a lot of growth to come in this market, since billions of people around the world still don’t have smartphones. But beyond that obvious next step of deeper consumer penetration, I think something more exciting is happening. It’s been dubbed “the Internet of Things.”

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We don’t need to read the tea leaves to see this happening. It’s already quite obvious. Just look at Google’s latest acquisitions. They paid $3.2-billion (U.S.) for Nest Labs, maker of an Internet-connected home thermostat. Shortly thereafter, Nest acquired Dropcam, a maker of Internet-connected security cameras, for about $550-million. Nest has turned into Google’s in-house platform for the Internet of Things. Nest has just announced a developer program so third-party vendors can build devices that connect to the platform.

Apple has been busy too. At their latest developer conference in San Francisco, they announced something called HomeKit, a set of developer tools for vendors to connect their Internet of Things devices with Apple’s iOS devices.

Whether it be doorbells with built-in cameras, garage door openers, in-home lighting or even the cars we drive, it’s looking more and more as if our smartphones are becoming the remote controls for everything we do in life.

Not only do I expect Apple and Google to make it easy to connect third-party devices with iOS and Android devices respectively, but I think they’ll actually update their operating systems so we don’t need a plethora of separate apps. Why should I need one app to control a thermostat, another for lighting, another for heating and air conditioning, and yet another for my security cameras? This is a no-brainer opportunity for the mobile platform winners (read: Apple and Google) to give software developers easy ways to integrate their products with the operating system that we already use in the palms of our hands.

I love investing in trends that are already obvious, likely to have a big effect on how we interact with the world, yet are long-term in nature so I can benefit from years and years of growth. The Internet of Things fits the bill nicely. I’d love to give you a bunch of fascinating stock ideas consisting of companies that are making really cool devices. But many of the players in this industry are privately traded, just like Nest and Dropcam before Google bought them. Others are large, diverse companies such as Philips or General Electric.

While I keep searching for exciting smaller companies in this space, I think the obvious answer is to start by investing in Apple and Google, who control the mobile device platforms. We’re going to interact with Internet-connected devices through our phones. The phone is our remote control. Developers are going to chose iOS and Android because those are the only two platforms, today, that offer both immense market share and leading edge software tools to connect their devices to mobile phones.

This trend reminds me of the growth of the Internet in the late 1990s. Network operators spent billions upon billions of dollars building huge optical fibre networks. As an investor I bought into companies like JDS Uniphase, who sold optical components. They were the leading arms dealers in the optical networking war.

Today I think Apple and Google are the arms dealers in today’s new “Internet of Things” battle. Except they are giving away their firepower in the form of software tools and exposure to a massive population of users. It’s already very difficult for any new competitor to catch up to the sophistication and completeness of the app store that both iOS and Android offer to users. But now with their early push into the Internet of Things, I think it seals their fate as winners over the next decade.

Disclosure: I have personally owned shares in Apple and Google for many years, and I hold both stocks in my Strategy Lab model growth portfolio.

 

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