The importance of the Consumer Electronics Show — invariably shortened to CES — waxes and wanes. The Vegas-based tech jamboree kicks off every year with several glossy magazines’ worth of hyped products, but it usually turns out that the higher-resolution TV screens or new media formats on show fail to revolutionise our lives. Some years it’s one big yawn-fest.
That’s been especially true in recent years, since Apple — by far the most crucial player in the genuinely world-altering smart device revolution — skips the event. With the iPhone and the iPad debuting elsewhere, CES has sometimes seemed a showcase of also-rans and me-too copycat products.
For a behind-the-scenes player like ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US), that’s hardly mattered. Its chip designs are in 95% of smartphones, regardless of who makes them. While US rivals like Qualcomm and Intel have vowed to take some of its market share, so far they’ve little to show for it.
No wonder ARM’s shares have risen more than 1,000% over the past five years. Yet incredibly, there could be an even bigger opportunity ahead for ARM — one that’s clearly visible on the show floor at CES.
No thing is an island
As a 30-minute wander around CES will prove, 2014 is being seen as the year that the Internet Of Things (IoT) reaches a critical mass. And ARM looks well placed to capture another huge market opportunity.
If you haven’t heard of the IoT yet, the concept is pretty simple. While we take our smartphones everywhere and we’re seldom far from a web service or internet-enabled screen, most of the stuff that surrounds us is inert as far as the internet is concerned.
Modern cars feature a lot of computing prowess, but it’s under the hood and unconnected. TVs, washing machines and even some central heating systems have more processing power than the computers of yesteryear, but in the main they’re independent silos — islands in the same way that home PCs in 1980s could only share information via files swapped on floppy disks.
Such isolation is looking increasingly anachronistic, and the IoT is the name given to getting all this stuff that surrounds us online.
A smart fridge that communicates with your phone to tell you what to buy in Tesco is the most common (and derided) example, but it’s really just an easy one to illustrate. In the same way that we could scarcely imagine in the early 1990s how the internet would impact everything from music to healthcare, the IoT will inevitably create solutions to problems we didn’t know existed.
It’s alive!
A host of manufacturers are talking up the IoT at CES this year. The most obvious are the wearable technology peddlers, who are trying to give smart watches another big push into consumer consciousness. But wearable technology is just a stepping stone between the IoT and the smartphones it typically relies on.
More radical IoT solutions will be passive. Things will “just happen”, in the same way that we’re not surprised to see our Facebook pages updating or email arriving.
Take Bosch, for instance. Best known to most of us as a manufacturer of power tools, the giant German engineer put the IoT centre-stage in its CES push, with a new general purpose sensor that combines humidity, temperature, and pressure sensing into one internet-enabled package. Add in proximity tracking via a smartphone and your home could know whereabouts you are, what the conditions are like, and immediately make adjustments.
At the other end of the spectrum, a start-up called Sense launched a product called Mother to help people build their own Internet Of Things, by connecting various motion detectors with your home Wi-Fi network. The idea is that putting technology into the hands of so-called ‘makers’ will enable innovation just as the ease of creating a web page kicked off the first internet revolution.
From slow cookers controlled via apps to cars that can be parked via a swipe on your iPhone to the world’s first internet-connected tennis racket (it captures your moves via Bluetooth for later analysis), CES is stuffed full of IoT products — most of them demanding invisible technology that’s right in ARM’s wheelhouse.
A massive opportunity for little chips
You see, ARM owes its success in smartphones to two critical factors — its leadership in designing low-energy consuming and cool-running microprocessors, and its business model where it licenses this technology to third-parties to manufacture and deploy as they choose.
It already boasts all kinds of intellectual property that will find a ready role in the IoT, as well as putting new IoT designs at the centre of its future roadmap.
The company’s ubiquitous presence in mobile phones has seen over 20-billion ARM-based chips ship to date, but if technology is eventually embedded in everything from cars and bathroom mirrors to plant pots, then that number could seem a drop in the ocean. ARM itself reckons the IoT is at least ten times bigger than the mobile internet, foreseeing 100 billion devices out there talking to each other. These will need cheap processors to be cost-effective, and they will need to use little power and reliably run for years — attributes where ARM has the edge over companies that earned their stripes in the pumped-up world of PCs and servers.
ARM-ing the future
Next time you look at ARM shares, then, and you see they are trading on a forward P/E of 45, remember this is the opportunity that the market is attempting to price in.
By no means does ARM look cheap — on current growth rates it doesn’t even look fair-value. But the same was true half a decade ago, before the scale of the adoption of smartphones — and the resultant revenues flowing back to ARM — kicked in.
