James Faulkner on making money from the “internet of things”

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According to research from Gartner, a quarter of a billion connected vehicles will be on the roads by 2020, as the ‘internet of things’ takes hold. This will enable new in-vehicle services and automated driving capabilities.

“The increased consumption and creation of digital content within the vehicle will drive the need for more sophisticated infotainment systems, creating opportunities for application processors, graphics accelerators, displays and human-machine interface technologies.”

“At the same time, new concepts of mobility and vehicle usage will lead to new business models and expansion of alternatives to car ownership, especially in urban environments.”

While striking, this is just one facet of a wave of new technology that promises to bring new levels of interaction between all kinds of devices. This is essentially the next stage of the growth of the internet, which promises to open up a whole new world of possibilities.

Unsurprisingly, it is the smartphone market that is leading the way for now. Cellular M2M (machine-to-machine) connectivity services revenues, according to a study by ABI Research released in July 2014, are forecast to grow at 28% CAGR (compound annual growth rate) 2014-19 globally reaching annual revenues of $18.9 billion in 2019. Asia-Pacific is expected to be the leading region in revenue growth with 34% CAGR 2014-19 reaching revenues of $5.9 billion in 2019.

However, as Gartner’s forecast for the motor industry suggests, this is a revolution that is about to spill over into other areas. In fact, according to Janus Bryzek, the man known as “the father of sensors” (and a VP at Fairchild Semiconductor), what we are about to witness amounts to “the largest growth in the history of humans”.

It is hard to put into words just what the advent of the internet of things means for our societies and economies, but this selection of predictions from the great and the good (and ugly) of the investment world may convey something of its scale and scope…

Machina Research: Consumer Electronics M2M connections will top 7 billion in 2023, generating $700 billion in annual revenue.

ABI Research: The number of active wireless connected devices will more than double from the current level to 40.9 billion by 2020. 75% of the growth between now and the end of the decade will come from non-hub devices (e.g. sensor nodes and accessories).

Navigant Research: The worldwide installed base of smart meters will grow from 313 million in 2013 to nearly 1.1 billion in 2022.

Morgan Stanley: Driverless cars will generate $1.3 trillion in annual savings in the United States, with over $5.6 trillions of savings worldwide.

GE: The “Industrial Internet” has the potential to add $10 to $15 trillion to global GDP over the next 20 years.

So how can UK investors access this exciting market?

One company that may be worthy of consideration is Telit Communications (TCM). Telit has been strengthening its position as a leading M2M module supplier worldwide, with a market share of about 30%, according to the company’s own analysis of the industrial internet market. Continued growth in the number of new customers contributed to the revenue growth of 27.4% in the six months to 30th June 2014. The firm also enjoys a broad customer base, with the top 10 customers contributing 36% of total revenues during the first half.

Telit also benefits from a diverse geographical footprint. Revenues in EMEA (Europe, Middle-East & Africa) increased by $6 million, representing 42% of the overall revenue for the six months to June. Operations in the Americas continued with significant revenue growth of $20.2 million during the period. Meanwhile, APAC (Asia-Pacific) also showed an increase of $3.5 million in revenues and a corresponding increase in its share of total revenues.

Telit is a major technology innovator, with research and development operating expenses (expenses before capitalization and amortization of internally generated development costs) having increased by $10 million to $22.7 million (16.4% of revenues) compared with $12.7 million in H1 2013 (11.7% of revenues). R&D expenses increased mainly from the development of 4G LTE modules designed for use in the most demanding automotive and industrial M2M applications and continuing investment in m2mAIR and the PaaS.

More recently, a trading update for the year ended 31st December 2014 demonstrated further robust growth, with revenues showing year over year growth of 21% to $294 million. A particular bright spot was the recurring service revenues generated by m2mAIR, Telit’s connectivity and cloud Platform as a Service (PaaS), which are expected to be c.$20 million, representing a growth rate of 104% over 2013.

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