As the velocity of corporate earnings reports dies down and on the heels of economic data that point to a firmer U.S. economy, challenged consumer investors will be turning their eyes to what some would call a technology pilgrimage.
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I’m talking about Apple’s (AAPL) annual World Wide Developer Conference that is scheduled to be held next week. Historically, these events have been used to showcase new products and the latest software updates. This pattern has led to growing rumor mongering ahead of the actual event, so much so that it runs the risk of being a letdown.
This year we’ve heard the chatter of new iPhone models, an update that brings us to iOS 8, a new health and fitness app, and of course the much talked about iWatch and Apple TV. Ahead of the event, Apple even updated its website touting "exciting announcements" to be made and has invited people to watch CEO Tim Cook’s keynote address live via streaming video when it begins on June 2.
A few days ahead of the event, however, something else has started to take center stage – software that would allow Apple to make its iPhone the central hub in the Connected Home. Many companies, including AT&T (T), Verizon Communications (VZ), Microsoft (MSFT) and even alarm and security company ADT Corp. (ADT) are looking at incremental revenue opportunities associated with the Connected Home.
Is there any “there, there” when it comes to the Connected Home?
A new report out by Forrester Research finds that one in five adult American Internet users already has a device at home that connects the physical environment to the Internet. Google (GGOGL) recently acquired Nest, a company that offers Internet-connected thermostats, smoke and carbon monoxide alarms that help cut energy bills and improve safety. There are also security applications like the Dropcam cameras that provide a live video feed from your home to your phone and the soon to be released Dropcam Tab sensors that keep tabs on what’s open or closed and what comes and goes from your home.
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Further evidence of this burgeoning market can be seen in the recent deal between Microsoft and Insteon. Beginning in June, Microsoft's online stores will begin selling Insteon kits that have an Insteon hub control unit and a number of different, connected sensors. Per the company’s website, you can “control Insteon light bulbs, wall switches, outlets, and thermostats at home or remotely and receive instant email or text message alerts from motion, door and window, water leak, and smoke sensors while you’re away.”
Microsoft will also sell Insteon products in its retail stores, and Insteon will offer apps for Windows phones. If you need further proof of this emerging industry, look no further than Amazon (AMZN), which has a home automation store.
Whenever I see these potentially large market opportunities lining up, I tend to think of the ensuing price competition and margin pressure that will eventually happen. I also look for a company or set of companies that have a key piece of technology for this market shift. In this case, making a smartphone – be it an iOS, Android or Windows powered one – able to communicate with these various devices means some form of wireless connectivity.
While there are several companies that play in this space -- Broadcom (BRCM), CSR plc. (CSRE) -- the one that clearly sees the benefits in its chip and licensing businesses from the continued adoption of 3G and 4G wireless technologies around the globe, the ongoing shift toward smartphones and tablets, as well as the growing connectedness across the home and the car is Qualcomm (QCOM).
Aside from the high margin “license if you want to buy chips from us" strategy and a customer base that is the who’s who in digital devices, the company has a strong history of returning capital to shareholders through the combination of an increasing dividend and share buyback policy. In sum, that offers a powerful combination as mobile connectivity begins to move beyond smartphones and tablets.
Chris Versace has no positions in any companies mentioned, but the Thematic Growth Portfolio that he manages owns AMZN and QCOM shares.