Money Morning readers know how much I love the exploding trend in wearable tech. It has created a critical need for apparel that can best integrate today's burgeoning technology.
Consider specifically fitness-related wearable tech. Its successful integration (or lack thereof) will have a very real impact on athletic performance. In professional competitions billions are at stake.
There's a massive battle in tech-supportive apparel - or more simply, "smart clothing," - brewing. I have handicapped the participants and picked the one that will generate the most handsome gains.
A Huge Opportunity at Stake
Some runners among our Money Morning readers will recall the earliest Garmin GPS watches for tracking road mileage. Although cutting-edge technology at the time, they would have been best sold with a backpack rather than watch band as their bulk was comparable to that of a small refrigerator. Fortunately, the performance of the watches has improved tremendously while their size has greatly diminished.
Like those original Garmin watches, the relative size of most wearable athletic technology has diminished to the point where the clothing itself incorporates the technology and becomes "smart." That's what we're going to focus on today.
First let's note that while leading tech names such as Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG, GOOGL) clearly have a significant part to play in wearables, it's going to be sportswear companies that may see the most dramatic percentage climb in stock price.
Neither of the tech behemoths' stock price will be decisively affected by revenues from wearable technology. Wearable technology sales, even if they are significant, won't transform either company. However, for sports apparel companies, the wearable technology trend is a make-or-break proposition. The one that prevails will see its stock skyrocket.
IDTechEx, a leading emerging technology research firm, estimates sales of "wearables," - or, loosely, both external wearable items and apparel - as rising to $70 billion by 2024 from its current $14 billion.
According to another research firm, The Gartner Group, smart clothing is expected to go from practically no sales in 2014 to more than 10 million units in 2015, and 26 million in 2016. That's quite a growth curve.
The thing is, if you're going to pack sensors and ultra-small technology into something, your largest "working area" is inclusion in the apparel rather than strapped on to a wrist. There are already jackets for cyclists that have built-in white and red LEDs that will automatically light up in dark conditions and signal turns and stops by reading the movement of the rider's body.
When considering the two reports together, it is reasonable to say that the sports apparel companies that produce smart clothing will be major players.
And I'm banking on sports companies - particularly Under Armour Inc. (NYSE: UA), Adidas AG (OTCMKTS ADR: ADDYY), and Nike Inc. (Nasdaq: NKE) - to start ramping up their marketing machines and sell these to a massive (and receptive) audience in coming months. They all have product lines of wearables and smart clothing in place for 2015. Let's take a closer look at them.
The Big Three
The crucial components of smart clothes - better mobile devices that can run increasingly sophisticated applications, and improved sensor technology - are coming together right now. And there are few more visible sectors than professional sports to highlight clothes and equipment that can measure and improve performance.
Adidas has been in the wearables sector for about a decade. But it has really begun to up its game within the past year or two.
It has a line of miCoach wearables already firmly in place. Gear ranges from a watch to a soccer ball that will tell you where you hit it, how fast it's moving, and how efficient your kick was - as well as showing you a history of your kicks - to its speed cell, which can monitor distance, burst speed, top speed as well as other performance measures for runners, basketball, rugby, soccer and tennis players.
Adidas was in the first wave of smart clothing and wearables around 2007 and continues to sell a miCoach training shirt with a heart rate monitor for around $60. Last year it started getting "smarter." Adidas launched a new "cool" collection, Climachill, which adds titanium and aluminum into the fabric of the garments in order to give the wearer a cold sensation while working out. The goal is to keep muscles cooler so you can extend training and enhance performance.
And Adidas is working with world famous soccer team AC Milan on a pilot program for TechFit Elite, a sleeveless shirt that monitors vitals.
Unfortunately, Adidas's exposure to the ruble via its Russian division has hurt profits. Yes, the devaluation of the euro versus the dollar will boost earnings on U.S. sales. But even on its home turf - Western Europe - it has fallen behind Nike in terms of revenue growth. Nike notched a 32% gain last year; Adidas only grew sales by 10.5%. As a result, its stock price fell over 40% in 2014. Its stock is also exceptionally volatile, with a beta of over 1.5, compared with 0.80 and 0.89 at Nike and Under Armour, respectively.
Under Armour started as the next iteration of a sports clothing company, developing clothing for football and baseball players that would keep them warm (or cool) and dry in the most demanding conditions.
Since its founding the company has been a juggernaut. The stock is up over 1100% since its launch in November 2005. Nike stock is up about 330% over the same period. And it is only one of four companies in the S&P 500 that has posted 20%-plus sales growth in the past 4.5 years
Granted, Nike is ten times the size of Under Armour, but aggressive branding and smart expansion into complementary sectors have made UA efforts highly effective.
The stock has been on a tear recently, reporting a banner year in 2014 and making some big acquisitions in recent months. In early February it announced the purchase of two of the largest free fitness apps in the world, Endomondo and MyFitnessPal.
MyFitnessPal has 80 million users and Endomondo has 20 million users. Both will be incorporated into UA's current UA Connected Fitness line.
It also just announced a deal with phone maker HTC to develop a fitness band, the first fitness product developed for HTC.
The challenge for UA is it's trading about 80 times earnings and while that may be acceptable for a tech company this is, after all, a sports apparel and equipment company. That to me is very troubling.
Nike pioneered its smart shoes in 2006, so it's been in the sensor game longer than most of the major players. But its discontinuation of its FuelBand smartwatch line looked like capitulation just as the big players were getting started.
But there's another way view it. Apparently in early December, Nike was awarded a patent for its Nike+ sensor technology fitted inside a shirt. And Nike already has at least 18 million Sensor+ users. Transitioning from a shoe to a shirt should be a shorter leap.
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What's more, these types of smart shirts, since they monitor heart rate, blood pressure, etc., can also be a boon for healthcare rehab in cardiovascular units.
It seems Nike's approach is to concentrate on developing software that appeals to its customers and let others make the hardware. Now that they can embed tech within the textiles, the hardware component is a risky departure from the company's core competency.
Nike's earnings per share, at $3.36, greatly outstrips Under Armour's $0.94. Its P/E is a reasonable and sustainable 29, compared with Under Armour's 80. And, as mentioned above, its stock is slightly less volatile than Under Armour's (and far less of a roller coaster ride than Adidas).
Nike is working on partnerships with Apple and others, but the real opportunity lies with making their own goods popular. Betting on its stock today will give investors a good way to play the wearable technology trend.
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