David joined Pimm Fox and Lisa Abramowicz on Bloomberg Radio. You can listen to the replay here.
As one of the largest technology-oriented trade shows globally, the Consumer Electronics Show (CES, held 1/5-8/17 in Las Vegas, 200k+ expected attendees, 2.5mm square feet of exhibits) sets major technology themes for investors to track over the coming year. Note, however, that as CES typically showcases technologies in their early stages of commercialization, there is a history that what is hyped at CES often fails to live up to its promised potential (for discussion, see: http://blogs.barrons.com/techtraderdaily/2016/12/23/failures-of-ces-the-best-of-the-words-of-the-last-decade/). While historically the focus of CES was on hardware products, the commoditization of hardware has meant that software is now the major point of competitive differentiation. With software in the lead, we look for the following five areas to capture attention:
Artificial Intelligence (AI):
Last November, Goldman Sachs said AI is the “apex technology of the information era,” predicting advances in machine learning and deep learning will lead to a new niche market of the technology industry: AI-as-a-service. This should lead to a resurgence in productivity as both menial and complicated tasks are handed off to powerful machines. The core of this trend is the compilation of massive amounts of information provided by the billions of internet-connected devices now being deployed. The ability to structure and learn from the data will be central to this market’s development. For example Tesla has aggregated more than 800 million miles of driving data in 2016, giving it data about human driving behavior. According to IDC, annual data generation is expected to reach 44 zettabytes by 2020, an estimated compound annual growth rate of 141% over five years. A wide range of companies are focused on AI, with Alphabet (GOOGL), Amazon (AMZN), Facebook (FB), IBM (IBM), and Microsoft (MSFT) among the leaders.
Augmented Reality (AR):
Forrester states that “technologies that cross the physical/digital divide represent the future of computing.” CES 2017 will have the largest showcase of AR technology ever, with over 70 companies represented, up +48% from CES 2016. As a result, the AR section at CES will nearly double year-over-year, to a 8,500 square feet space, with 20 companies such as GOOGL through its Project Tango partnership with Lenovo (LNVGY) showing off new AR technologies. In 2017, IDC expects a number of hardware vendors to enter the virtual- and augmented-reality space with head mounts that are both tethered to gaming consoles and untethered stand-alone products. While virtual reality struggled to take off in 2016, with FB recently announcing an overhaul of its Oculus unit amid disappointing sales, AR may have better luck as people find ways to more easily integrate it with their daily lives. AR and VR headset shipments are expected to see a compound annual growth rate of 108.3% from 2015 to 2020, reaching 76mm units by 2020, according to IDC. Apart from the companies mentioned, there is constant speculation that Apple (AAPL) is poised to launch AR products, following its January 2016 acquisition of Flyby Media.
Cloud Computing & Internet of Things (IoT):
This sector is advancing steadily to enhance how everyday objects connect and interact. According to IHS, low-power technologies are expected to extend the reach of IoT devices in 2017 with the first low-power, wide-area networks coming on line to provide an alternative to short-range wireless technology powered by standards like Wi-Fi and Bluetooth. This advance should allow hard-to-reach devices to gain internet connection, while improving the efficiencies of already deployed devices. It will also enable telecom providers to support low-bit-rate apps, making way for a greater range of objects to be embedded with chips and be connected. This may span the spectrum from devices on buildings to devices in deeply rural natural habitats. To power the increasing level of connectivity and bandwidth needed to process the data, cloud computing, data centers and lower-power-high-power chips will continue to be a large area of investment in 2017. By 2020, IDC predicts that the vast majority of all enterprise IT infrastructure and software spending will be for cloud-based offerings. AMZN, IBM and MSFT are cloud computing leaders.
2016 saw the intersection of the technology and automotive sectors with competitors either partnering with automotive original equipment manufacturers (e.g. Blackberry (BBRY)) or undertaking their own independent efforts (e.g. GOOGL). Note that in late November 2016, AAPL made a submission to the National Highway Traffic Safety Administration (NHTSA) confirming its interest in autonomous vehicle technology. Note that the AAPL submission was only one of more than 1,100 comments submitted to NHTSA as it weighs new regulations for automated vehicles with comments coming from both industry incumbents (e.g. GM, which recently acquired Cruise Automation for $1bn to augment its autonomous vehicle program) and new entrants (e.g. Google parent company Alphabet which has already gathered over 2mm miles of public roadway testing). The NHTSA effort is aimed to put in place guidelines to assist in self-driving development. The pace of investment and consolidation in autonomous-vehicles is accelerating. Uber, recently valued at $62bn, has acquired NYC-based Geometric Intelligence Inc. which is focused on software for self-driving autos, a product area which Uber expects to roll out broadly in the near future. According to Juniper Research, autonomous vehicles sold are expected to reach 14.5mm by 2025. At CES 2017, over 200k square feet of exhibit space (roughly 20% of the entire show) will be dedicated to vehicle technology, with major auto brands showing off new technologies. In particular, self-driving exhibits will increase +42% year/year to 10 exhibitors. Major companies exhibiting autonomous technology include Delphi (DLPH), Mobileye (MBLY), Nvidia (NVDA) and NXP Semiconductor (being acquired by Qualcomm (QCOM)).
In 2016 the smartwatch sector came up a loser as 3Q shipments plummeted -52% year/year ahead of the Apple Watch Series 2 launch. However, at the same time, basic wearables such as fitness bands experienced better than +10% year/year growth. In 2017, the sector should have a major reconfiguration as devices becoming increasingly invasive and more capable at analyzing data to more proactively help users lead healthier lives. Companies are working to untether smart wearables from smartphones in hopes that more independent wearables increase demand. At CES 2017, wearables will double to 82 vendors exhibiting in 17k square feet and a new focus is expected to be on medical-device wearables that promise distinct health benefits. According to Juniper Research, world-wide wearable shipments to reach 420mm by 2020 versus the 80mm shipped in 2015, a more than 4x increase. A similar gain is predicted for medical devices, with shipments projected to triple to 70mm in the same timeframe. Among wearables, investors should watch AAPL and FitBit (FIT).