News hit the wires last week that Amazon.com Inc. (Nasdaq: AMZN) has purchased a home security start-up known as "Ring" - reportedly paying $1 billion for the privilege. Predictably, analysts fell all over themselves discussing how this move places Amazon front and center in the home delivery market.
Their thinking, of course, is off the mark. Amazon's after a much bigger and far more profitable prize...
... your life.
I'll get to that in a moment along with a play that could be Amazon's next target.
If you're not familiar with Ring, you'll probably want to be.
The company makes and sells video doorbells and stick-up cameras that can be placed anywhere. The two-way HD technology is terrific because it allows you to see and hear what's going on using nothing more than a cellphone from just about anywhere on the planet.
My wife and I purchased several Ring devices last year and we love 'em. Not only can we see who's at our front door but we can also review video, speak to visitors, and even check on packages. Much to our boys' chagrin, of course, we can also keep tabs on their comings and goings - but that's a story for another time.
The company also offers security sensors, flood and freeze detection, and smoke detectors. Ring devices can even "link" with other Ring users nearby to create a safer neighborhood. If no-goodniks are randomly probing your block, for example, Ring users can share activity reports. Sooner or later, they can notify the police if needed... video of the suspect(s) in hand.
That's not the reason for Amazon's interest either, though.
What Amazon ultimately wants to be is the single digital provider in your smart home.
The stakes couldn't be higher.
The first company that succeeds in positioning their devices and their ecosphere as your gateway will dominate a projected $130 billion market by 2025, growing at a compound annual rate exceeding 10% a year, according to Grand View Research.
This isn't just about devices like most investors think.
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Artificial intelligence and machine learning are going to be the real revenue drivers for the foreseeable future, and devices like Ring sensors provide another "touch point" in that process.
Every competitor hoping to gain a foothold is going to have to link consumers using a series of devices like Ring to connect customers with offerings that will be increasingly regarded as "platforms" rather than services or specific products as they are thought of by most people today.
I love the idea that I can vacuum our home, for example, by shouting at our iRobot Corp. (Nasdaq: IRBT) Roomba using Amazon's digital assistant, Alexa. Exercising the dog even takes on a new dimension because she stalks the vacuum cleaner, much to my wife's dismal reaction - and my amusement. And, best of all, I can watch both on our Ring cameras... from Tokyo!
Ironically, Amazon probably won't care very much about how many Ring devices it sells over time, just like Apple Inc. (Nasdaq: AAPL) really doesn't care too much about how many watches it sells. There's a higher purpose to both.
The real value is going to be how Ring's devices connect with and drive incremental voice sales from the estimated 800 million to 1 billion people around the world ready for the kind of hyper-personalized services I've just described. Roughly 80% of whom, I might add, want a single provider for their digital needs, according to Accenture.
No doubt you're beginning to put the pieces together.
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There's going to be a very pronounced change within the next few years as the entire consumer lifecycle changes to reflect this new reality. Online shopping, smartphones, and devices like those made by Ring are just the beginning.
The "platform" you use will allow companies to move past simple demographics and traditional advertising. That, in turn, will increase the speed, flexibility, and sell-through of uniquely personalized offerings tailored specifically to what you do and how you live your life.
At the same time, there will be new developments in artificial intelligence that further enhance this relationship while also making it more profitable for the companies that deliver it in ways that most consumers take for granted.
Tesla Inc. (Nasdaq: TSLA), for example, generates highly specific, data-rich maps, showing everything from traffic data to driver behavior in real time using sensors that detect damn near everything.
Contrary to what a lot of people believe about how self-driving cars work, Teslas are not programmed using explicit object detection, path planning, and traffic controls. Every Tesla car learns on its own by observing the humans who use it (and drive other cars nearby).
There is no doubt in my mind that Amazon is angling for the same thing with Ring, Alexa, and dozens of other devices being "linked" into its platform.
Speaking of which, I think Amazon is going to make another buy this year in this space. Only, this year, they'll move further "up" the value chain to do it.
My analysis of Amazon's thinking on AI tells me that the company has a rapidly developing need for mixed-signal and digital signal processing circuits that are easily connected to its already stellar digital platform.
I think Marvell Technology Group Ltd. (Nasdaq: MRVL) may be a good candidate, perhaps even the best of many out there.
The company is famous for its "EZ-Connect" platform which - not so coincidentally, I might add - is powered by Amazon's cloud computing services, Amazon Web Services (AWS). The platform makes it easy for devices to make the connection to AWS so that any customer (mostly companies and corporations) can store, process, and analyze data from thousands of connected devices worldwide.
Top-line revenue has grown for the past three consecutive quarterly reports by a total of 6.41% - while earnings are expected to grow 135.73% from last year, and at an annual rate of 16.33% over the next five years.
The company's operating margins, net margins, and return on assets are all higher than other industry players, according to Yahoo!Finance. I'm also attracted to the firm's Return on Capital using Joel Greenblatt's method, which is 165.75% as of October 2017.
Greenblatt's calculations, if you're not familiar with them, are a more accurate measure of how efficiently a company generates returns on capital actually invested in a given company using EBIT instead of net income like conventional calculations including tax and interest. You can read about this formula in his book, "The Little Book that Still Beats the Market," to learn more if you're interested!
And, finally, we're in good company. Jim Simons (Renaissance Technologies LLC), Joel Greenblatt (Gotham Asset Management LLC), and George Soros (Soros Fund Management LLC) have all made recent buys, according to filings.
The race for your life is well underway, which is why profiting from it may be the best revenge.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.