Searching for Iot space analysis

There was a great article in 2015 which spoke about the iot space and also the various players an dwho stands a chance to make it etc.

I never save d that article and am not able to find that

Any help would be appreciated

Rajesh

Hi Rajesh
I remember an article like that but not exactly which one. I will have a look for you but just in case I managed to capture it previously, this link below is where I have tried to consolidate IOT discussions on one thread. There are plenty of links to articles etc. Not sure if the one you recall is there.
Ant
http://discussion.fool.com/mega-themes-310-internet-of-thingsm2m…

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Also try these threads…
http://discussion.fool.com/iots-31377994.aspx?sort=whole#3137799…
http://discussion.fool.com/iot-opportunity-32036682.aspx?sort=wh…
http://discussion.fool.com/internet-of-things-31652061.aspx
http://discussion.fool.com/my-theme-based-motley-investment-phil…
Ab

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Thank you Ants.

There was a great article in 2015 which spoke about the iot space and also the various players an dwho stands a chance to make it etc.

Rajesh

Sorry, this is not what you are asking for but I’m taking the liberty to post it anyway. Just my personal views on investing in technology.

Having been in IT for most of my professional life I used to be a “technology” investor. No more. The future is too uncertain to predict. Those who get it right will make a killing in IoT (that’s the alluring siren song) but there is no assurance that anyone in particular will get it right (those are the hidden reefs). In consequence my idea of investing in IoT is to find the companies that will supply IoT, no matter who the winners or losers are. My pick is ARM Holdings (ARMH).

Denny Schlesinger

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Those who get it right will make a killing in IoT (that’s the alluring siren song) but there is no assurance that anyone in particular will get it right (those are the hidden reefs). In consequence my idea of investing in IoT is to find the companies that will supply IoT, no matter who the winners or losers are.

Even that has risk. Whereas in the 1990s the infrastructure pick was Cisco, it’s hard to pick who the equivalent will be for IoT.

My pick is ARM Holdings (ARMH).

There’s certainly something to be said for ARM’s architecture being the foundation for most of the chips used in IoT devices and applications. However, it’s unlikely to be the kind of win that Intel was as the desktop/laptop market took off, if only because ARMH’s business model is vastly different than INTC’s. ARMH doesn’t actually make chips to sell, they license a design for other’s to use or adapt. That means vastly less profit per chip. Now, that’s one reason they became a leader and why Intel has been unable to penetrate the mobile market, but it does in my view limit how much their stock will ever be worth. And right now, with a PE of about 40, how much of the future success is already built into the stock price?

I do agree it’s currently hard to pick IoT winners and losers. Thee’s no money in developing transport layers; in my view the money will be in the hardware that supports then. But, no defacto standards have yet taken root. And the protocol stack in particular (ZigBee, Z-Wave, Thread, VSCP, Hypercat, etc.) is far too much a “wild west” to pick a winner. That leaves applications, and we’re still quite early there as well.

One aspect of IoT to keep in mind is the breath and depth of technologies involved. Everything from acceleration sensors in watches up through telematics boxes in cars and trucks (and smaller and larger as well), plus servers, databases, analytic engines, web portals, etc. is in the IoT space. There will need to be short range, low power technologies so your watch talks to your phone, mid range technologies so your fridge talks to your computer, long range technologies so your phone/computer talk to the cloud, etc. And all that data needs to not only be accumulated, but processed, digested, and presented in useful ways (think Tableau). Then there’s data sharing and machine intelligence to take actions based on the data. So, it’s not going to be one set of standard hardware/software even on the infrastructure side. There many be multiple winners, yet none of those will be the grand slams like Cisco was.

In the 1990’s it wasn’t clear that a online book seller was going to grow up and become the 8000-lb gorilla of e-commerce in the 21st century. There were arguably more compelling stories at the time. And while there were fiascos like pets.com, there were mostly companies like eBay that had a good run, but not ultimate staying power. I’d argue that the differences between eBay and Amazon come down to management’s strategic thinking and taking advantage of what the market showed them. Who would have guessed in 2005 that 10 years later that a online retailer would own the new market of web service infrastructure, and that market would be in and of itself, huge? That companies like NetFlix and even Blackberry would use external web service providers?

I think all you can really do is see how a company’s management acts and how they invest in themselves. eBay stayed in auction land and didn’t really try to grow out of it. Someone else developed PayPal, for instance. Tesla, OTOH, went out and is building its own battery factory. I Tesla is also finding other uses for its technology, like expanding into home energy storage, much like Amazon founded AWS to rent out unused time on its servers that were built to handle the two-weeks before Christmas demand. I’m not saying TSLA is a great investment now, but its management is clearly thinking strategically.

I think the question we should be asking is: What other companies in the IoT space are thinking like Jeff Bezos or Elon Musk would?

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However, it’s unlikely to be the kind of win that Intel was

I’m pretty happy with the 15X gain I have on my older lots …

I’m pretty happy with the 15X gain I have on my older lots …

That’s so yesterday. You might as well be touting the money you made in Xerox in the 1960’s, IBM in the 1970’s, Microsoft in the 1980’s, Cisco in the 1990’s, or Apple in the 2000’s. All has-beens today in my book (yes, I’m harsh).

Here’s what I mean:
ARMH is down 17% for the last 12 months.
ARMH is up 54% for the last 5 years.
ARMH is not quite a 6-bagger for the last 10 years.

So, your 15X win must be over more than decade old. That means it incorporates all of the Mobile Market wins for the stock. Yup, that was the time to be in the stock. Heck, I remember people talking about RISC architectures in the late 1980s s the future (look how long that took to pan out into money). None of ARMH’s past success makes it the stock to be in for the future.

But, it’s possible. Show me how volumes for ARMH’s IoT devices will be at least an order of magnitude greater than for its phone/tablet market. I’m not saying it won’t be, it’s certainly possible, but I’m not convinced. And show me how ARMH is priced for the kinds of returns we want (demand?) if that success actually happens. Again, I’m not saying it won’t happen, but I’m certainly not yet convinced it will. Don’t forget to factor in the possibility of new architectures even more suitable for smaller IoT devices.

I will say that it’s rare for a stock to be a grand-slam home run hitter in two separate markets. Amazon may be doing it back-to-back with its online commerce and now web services dominance, but I’m hard pressed to find another example. Apple wasn’t that successful as a stock in computers, but it took off with phones, so that’s just one grand slam. It is now struggling to find “The Next Big Thing,” which some think is cars, but boy is that a gamble.

Back to ARMH, it’s possible it could be as huge in IoT as it was in mobile, but that’s not clear, at least to me, at this point in time.

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All of which I why I have trimmed what became a large position in ARMH to a smaller one, since it is big enough now that expecting 10X gains is rather wildly optimistic. But, I am also not about to get out of what I have because they continue to grow and we may well see a second big surge from IoT.

Re the business model, it seems to me that ARMH’s IP only model has minimal risk by comparison with INTC’s capital intensive model. There is no question that INTC represents the leading edge in terms of fab capability, but to the extent that people don’t need the edge, it may be huge investment with little return. ARMH has no such huge capital investment requirement.

Hi Smorgasbord1

Ok I lost one posting attempt so here goes another effort…

Show me how volumes for ARMH’s IoT devices will be at least an order of magnitude greater than for its phone/tablet market.

Ok this is the easy part. Most estimates for connected devices are 25bn-50bn so literally 10x greater than mobile/smart phone market…
http://www.statista.com/statistics/471264/iot-number-of-conn…
http://www.forbes.com/sites/louiscolumbus/2015/12/27/roundup…

In terms of units - it is also an order of magnitude greater, according to ARM: “The Internet of Things is more complex than the mobile Internet system. If the mobile Internet is 10 billion units, the Internet of Things is 100 billion units” - see ARM’s IoT market outline on their website… http://www.arm.com/markets/internet-of-things-iot.php

Now in value terms, clearly the embedded IoT device and chip pricing will not be the same as mobile chips but the volume takes care of that.

So by 2020 ARM is targeting a 50% share in embedded/IOT space valued at $30bn TAM.

Furthermore ARM is calling out Servers as another market worth $20bn TAM that they are shooting for a 25% share in and Smart cars worth an additional $15Bn TAM. Leaving other networking and consumer device markets aside then, there will be 3 markets ARM is aiming for with the value of its mobile market ($18Bn TAM now but which is also still growing by 5-10% annually).

Effectively ARM still potentially has another 10x opportunity here if it performs as expected.

Back to ARMH, it’s possible it could be as huge in IoT as it was in mobile, but that’s not clear, at least to me, at this point in time.
Now to the question you raise regarding what makes us believe ARM stands a chance of success in IoT? Well even though it is a different end market it is still based on the core ARM offering of chip architecture design so it isn’t a complete stretch. ARM has always positioned themselves as the “Architecture of the Digital World” not the architecture of mobile. They already have $100ms of revenues in embedded chip sales and if anything the requirements of IoT play to ARM’s strengths - ie ultra low power consumption. 50% of their licensing is already embedded chip market and 45% of their units are already embedded sales. Whilst new architectures could come along and Intel is certainly pushing Quark heavily, it appears the market is already buying into the ARM IoT architecture and the ecosystem helps support that.

Overall whilst there might be a million form factors of IoT devices to come, I believe ARM has a real shot at becoming the underlying architecture in this market particularly given that it is positioning its own mbed software as the open source operating system (something it was never able to do in mobile or PC markets). This will not only help secure the opportunity for ARM chips with a strong moat but also drive important new revenue streams in areas such as radio comms (Cordio), security (mBed).

The strategic overview material about the connected world as well as the roadshow presentations ARM produces on their investor website are very instructive about this.
http://ir.arm.com/phoenix.zhtml?c=197211&p=irol-irhome
http://ir.arm.com/phoenix.zhtml?c=197211&p=irol-reportso…

Regards
Ant

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However, it’s unlikely to be the kind of win that Intel was as the desktop/laptop market took off, if only because ARMH’s business model is vastly different than INTC’s.

There many be multiple winners, yet none of those will be the grand slams like Cisco was.

Intel, Cisco, and the other gorillas were a special breed best described in The Gorilla Game. That’s over and done with. IoT will be much more of a commodity market.

I think the question we should be asking is: What other companies in the IoT space are thinking like Jeff Bezos or Elon Musk would?

I think you can only recognize the Bezos and the Musks after the fact.

Denny Schlesinger

Ant, I wasn’t in the mood to tout ARM but you certainly did a great job of it!

Denny Schlesinger

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Thanks - I actually found it helpful thinking this through from a big picture perspective. Now I see a path for ARM to move towards an Intel or Qualcomm sized business of $100bn+ proportions rather than stagnate at the $20bn level.

Whilst we never actually know these outcomes in advance otherwise it would be priced in from the start; the platform, execution track record and ecosystem they have demonstrated together with the progress in IoT and Smart cars to date for me makes the next multiples of returns less risky and more probable than the first 20x for me since buying in below 50 pence back when their lead end customer was Nokia or whatever it was.

I should probably stop trading my positions and go all in - long.

Cheers
Ant

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Some questions on ARMH. You guys got me interested so I’ve been reading about it.

  1. The revenues in dollars are only growing at about 12% to 15% but in British pounds it’s over 20%. So does that mean they are growing faster in constant currency? However, they say 90% of revenues are in dollars, so it sounds like the slower dollar rate of growth is the correct one. Is that the way you guys read it?

  2. Granted they are smart guys, and seem to have a long runway infant of them for licensing, but is there a part of what they license that is going to come out of patent any time soon? I would think that that might make a difference.

  3. I’m wrestling with a growth rate of earnings of 20% to 25% and a PE over 40. Especially as there are currently so many companies we know of that are growing earnings at 40% and have PE’s of 10 to 15. I can see that that is partly offset by having a lot of recurring revenue. Is that the way that you deal with it, or do you give more weight to other factors like having a large TAM? And does that make up for it?

Interested to hear from you.

Saul

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Saul:

With ARM you have to take a long term view.

http://softwaretimes.com/pics/armh-06-06-2016.gif

Right now they are at the tail end of the mobile market as smart phones have pretty much saturated the market. In such a situation cash cow replaces growth as royalties continue rolling in for a long time. At the same time, ARM is at the starting point in three innovations: IoT, smart cars, and servers. If successful each one will paint its own “S” curve on the price chart.

If you trust charts then between $40 and $45 is a decent entry point to wait for the long term growth. From Ant’s posts you can deduce that he has been trading the stock which is not a bad idea when it is in a trading range as it has been for the past three years. After a long absence from the stock I got back in in August 2015 at $42.52. At Friday’s closing price I had an IRR of 13.7%, 72% of it derived from trading calls. My expectation is that soon the stock should break out of the trading range as one of the three “S” curves kicks in.

One of the complications of evaluating ARM is that they have two income streams, royalties on products shipped and licenses permitting customers to use their IP. Licenses sold today will start royalty income streams six to twelve months out and which can last for years, while the product using the IP ships.

While I have not taken a close look, IP generally can be protected by patents, copyright, trade mark, trade secret, and non-disclosure agreements. In addition, open source software ecosystems are powerful in protecting IP. ARM provides a lot of open source software that makes using their IP easy. This last is not legal protection but an increase in switching costs that helps keep customers loyal.

The definition of “Gorilla” is “open proprietary architecture with high switching costs.” This is what ARM sells but as Dirty Dingus said, “ARM is a kinder, gentler Gorilla” (Intel is a mean old gorilla). That clients can chose their fabs has two benefits, they are not locked in to a sole provider and ARM is a very asset light business which justifies high price to book and high price to sales.

Denny Schlesinger

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I wrote some questions about ARMH above in #19432, but the more I think about it, there is one almost sure thing in the IoT world. And they aren’t even traditionally associated with IoT. But think of it this way. If IoT takes off the way you are speculating, ARMH will be a slow and steady probably winner, probably the same for SWKS, but it’s not them I’m thinking of. If there are billions of devices connected, there will be billions of chips needed but there will be 10’s of TRILLIONS of data exchanges EVERY DAY that need to be stored… on the cloud. And who has a lock on that?

Tune in on the next post for the not so surprise answer…

Saul

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Amazon!

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Amazon!

And maybe electronic storage space provider REITS like COR.

http://stockcharts.com/h-sc/ui?s=COR&p=W&yr=3&mn…

JT

6/6/16

DENVER–(BUSINESS WIRE)–

CoreSite Realty Corporation (COR), a provider of secure, reliable, high-performance data center and interconnection solutions across the U.S., today announced the availability of Amazon Web Services (AWS) Direct Connect at CoreSite’s Santa Clara Campus in the Silicon Valley Market. Through AWS Direct Connect, CoreSite customers can directly access AWS cloud services over a private, enterprise-grade network connection. The benefits of this direct access include reduced network costs, improved network security, and greater network performance.

CoreSite has been providing its customers with direct access to AWS Direct Connect service since 2011. With this expansion, AWS Direct Connect is now directly available in three CoreSite markets with deployments in Los Angeles, New York/New Jersey, and Silicon Valley. Additionally, access to AWS Direct Connect is available in five major markets through CoreSite’s Open Cloud Exchange. AWS Direct Connect is available across CoreSite’s entire data center portfolio through its carrier partners…

http://finance.yahoo.com/news/amazon-services-adds-aws-direc…

JT

And maybe electronic storage space provider REITS like COR.

Dupont Fabros Technology

http://discussion.fool.com/dupont-fabros-technology-32268934.asp…

Denny Schlesinger

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