If you've blinked in the last 14 days, you might have missed this...
ARM Holdings PLC (Nasdaq ADR: ARMH) - one of the world's dominant mobile-device chip companies - bought a small Finnish software startup called Sensinode Oy in a deal whose price wasn't reported.
And most folks shrugged it off as just another of the thousands of below-the-radar deals that companies do every year.
But this one's different.
ARM's buyout of Sensinode is the latest reminder that the single-biggest profit opportunity currently on my radar screen is about to start paying off.
And because we're talking about a $14 trillion opportunity - meaning this newly emergent tech market will actually approach the entire U.S. economy in size - I want you to see what's going on here.
I'm even going to show you the top companies I've identified...
The First Billion-Unit Year
Just last week, IDC Research announced that smartphone shipments will reach 1 billion units this year - the first-time we've hit that key threshold. That's 40% more than last year and is just the latest sign of the torrid growth we've seen in this market.
It was just two years ago that smartphone sales flirted with half a million for the first time ever, meaning shipments of this device have doubled in that span.
In short, everyone has a smartphone these days.
But what a lot of folks don't realize is that this is just the beginning of a whole new, networked world.
And for investors, it's like getting a second chance to profit from the invention of the Internet.
If you think back, the Internet revolution started with a proliferation of desktop and "laptop" PCs. Lots of investors made nice money on computers, microchips, and software.
But it was when all those PCs were strung together via the Internet that the real fortunes were made.
And that's just where we are with smartphones.
The next thing we're going to see is a big "Super Internet" that opens the door to all sorts of opportunities, including:
- "Wearable" technology like "smartwatches" or intelligent glasses.
- "Smart shirts" that can monitor your health and report right to your doctor.
- So-called "smart homes" that can be configured from afar (you could control your entertainment system, your air conditioner, or safety-monitoring systems).
- All sorts of government, industrial, medical, and e-commerce capabilities.
This ubiquitous next phase is called the "Internet of Things" (IoT) or "Internet of Everything" (IoE). And it's much closer than you might imagine.
IMS Research says there will be 30 billion connected devices by 2020. Telefonaktiebolaget LM Ericsson (Nasdaq ADR: ERIC)- one of the largest telecommunications companies on the planet - says there will be 50 billion enabled devices in place worldwide in that same time frame.
The profit potential is massive - and dwarfs anything else I'm following right now.
And one company is perfectly positioned to ride this wave.
I'm talking about ARM Holdings.
Cashing in on Connected Devices
ARM executives view the Sensinode deal as one that's critical to the mobile chipmaker's aim to become a major Internet of Everything player.
ARM is part of the new breed of semiconductor firms known as "fabless" players. What that means is that ARM designs chips that are modified and made by others - allowing it to collect hefty royalties for its innovative work.
This strategy is an important one for a couple of reasons. First, ARM's "factory-less" business model makes it a high-margin operation. Second, ARM really is an innovative player: The company's microprocessors run nearly all of the world's smartphones and roughly one-third of all consumer devices.
Little wonder ARM shareholders have been among the biggest winners of the Mobile Revolution. Over the last five years, ARM Holdings shares are up 602%. In other words, $25,000 invested in ARMH in September of 2008 would be worth $175,000 today.
But before you lament having "missed another one," let me be very, very clear: The Internet of Everything is going to blast ARM Holdings to a whole new level.
The best is yet to come. And when it does, the investors who start positioning money now are going to smile like they profited from a true gold rush.
You see, a total of 8.7 billion ARM-based devices were shipped last year.
But only a fraction were actually networked.
And that means ARM has a huge opportunity that's there for the taking.
Networking heavyweight Cisco Systems Inc. (NasdaqGS: CSCO) estimates that there were 8.7 billion Internet-connected devices in place at the end of last year. Cisco says that number will nearly double to 15 billion by the end of 2015 and will approach 40 billion by the end of the decade.
But 99% of all physical objects that will one day join the massive IoE system are not connected today.
Indeed, Cisco's CEO John Chambers recently estimated that the IoE will be worth $14 trillion. And that's just on the profit side. Actual sales of IoE products like microchips, sensors, and networking gear will be many times that amount.
As Chambers sees it, virtually every company in the global supply chain - from trucking firms to automakers - will tap into the IoE. They'll use the technology to lower their manufacturing and distribution costs, as every machine, truck, forklift, and component has an IoE access point.
And that's where's ARM's new Sensinode unit comes in. The startup has a suite of software products that can be "embedded" in devices so they can connect with the Internet and then communicate with one another.
Sensinode will fit nicely into ARM's existing "mbed" program, which designs micro-controllers for digital devices used in an interconnected world.
John Cornish, executive vice-president and general manager of the system design division at ARM, says the purchase will help his company deploy "thousands of new and innovative IoT applications."
Added Cornish: "ARM is dedicated to enabling a standards-based Internet of Things (IoT) where billions of devices of all types and capabilities are connected through interoperable internet protocols and web services."
For its part, Sensinode is now focused on three main IoE markets. They are:
- Connected Homes: Today, residential systems like energy monitoring, home security, home automation, and elderly monitoring are connecting to the Web for more efficient user interface. Sensinode has software that runs wireless devices, routers, and smart meters.
- Lighting Control: Sensinode focuses on mass-scale lighting applications, including those for commercial buildings, street lights, and outdoor LED lighting. It offers a street lighting app that includes Google Map integration with real-time monitoring and control, alarms, firmware updates, and light-group management.
- Smart Grid Networking: The company specializes in infrastructure systems for automatic meters. These allow communication with wireless meters, sub-meters, and home devices. Sensinode's software works with low-cost chips that communicate through radiofrequencies.
The Next Digital Gold Rush
ARM isn't yet forecasting the revenue boost it expects to derive from the Sensinode buyout. But new ARM Holdings CEO Simon Segars had only held the job less than two months when he announced the move. So you can bet that the payoff will be huge.
And with the stock trading well below its recent high, the timing couldn't be better.
That bodes well for the stock's long-term potential and comes at a time when the stock is trading below its recent high. After gaining more than 115% in a 12-month stretch that ended May 16 - which saw the stock peak at $50.56 a share - ARM's stock sold off and was recently trading at roughly $41.
Analysts chalked up the decline to profit-taking. But there was also an issue of confusion that's granted us a chance to scoop up ARM shares on the cheap.
On July 20, ARM said it had increased second-quarter sales 24% from the year-ago period to $213 million. Earnings-per-share rose 37% to reach 8 cents a share.
But many investors were confused by the earnings statement.
You see, ARM Holdings is based in the United Kingdom. As a foreign entity, it has opted to comply more closely with global accounting procedures known as International Financial Reporting Standards (IFRS).
Under IFRS, ARM reported a 73% earnings decline after accounting for overhead and other general expenses.
But as someone who has followed the firm for years, I'm not worried about the company's underlying operations. In fact, I see the stock's recent correction as a new buying opportunity.
Because of its dominance in the smartphone and "device" markets, ARM essentially has a "license" to print money. The company has a relatively modest market cap of roughly $19 billion, roughly $874 million in cash on hand, and almost no debt.
ARM even generates $261 million in free cash flow (FCF) a year.
Over the past three years, the company has grown earnings per share by 31% a year, meaning ARM's profits - and its stock price - could double in about 2.5 years.
Clearly, ARM stands to grow even more in the years ahead as it targets the huge market for the Internet of Everything.
And this is just the first of a number of profit opportunities that will allow us to double our money - or more - as we cash in on this next phase of the Internet.
It will be like a tech-sector gold rush.
And I'll be honored to be your guide.