Everything in our lives has become connected to technology in one way or another. In classrooms where I give speeches, students request me on LinkedIn (LNKD) while I discuss investing and Wall Street. At the library, children are unable to get work done because they are checking Facebook every 10 seconds. It's great to have access to information on demand, but it's dangerous in some respects (in the case of students, it's dangerous to their attention spans).
So it was no surprise that as I was reading up on the next major movement in the auto industry, the concept of the connected car, that the word "dangerous" came to mind again. Do we really need to have access to Facebook and Twitter while barreling down the highway? Should a 17-year-old driving his or her parent's connected car home from a party be able to voice text a friend?
Whether I agree with the merits of a connected car or not, the concept is moving quickly beyond Ford's (F) pioneering SYNC system developed by Microsoft (MSFT). What was once a novelty is now a must-have feature in an automobile: no cool functionality equals the risk of lost sales. Since bringing our digital lives into our cars is still in the infant stages, room to profit from identifiable winners is attractive in that valuations don't reflect future earnings potential.
What got me interested in the connected car thesis is the television show "MotorWeek," which I grew up watching. A recent episode shed light on an aftermarket company called Parrot, which makes Sync-like systems for older automobiles that were never intended to incorporate technology in the dashboard that all but drove the car. Parrot is privately held and a company that I could envision being bought by a major tech company seeking a bolt on business. That led me to thinking: What large tech company today shows outward interest in the connected car? Those companies that have demonstrated a solid plan of attack would be ahead of the curve, creating pricing power opportunities and a strong initial market position in an expanding industry.
Connected Car Talking Points
- According to automobile surveys, 60% of the world's population will live in urban areas by 2030, causing significant congestion on roads. To prevent accidents, this connected car technology must be implemented (cars may connect to one another, helping to alert one motorist of another's proclivity for running red lights). More people in urban areas, specifically wealthier individuals who utilize the newest technology, will want to keep connected from destination to destination.
- In 2012, factory-installed vehicle technology connected with Ford's SYNC, Chrysler's Uconnect, or Audi's Connect will account for $7 billion in sales for the industry.
- Only 15% of U.S. households currently own a vehicle with connected communications.
Other Areas of Interest
- Audi will soon unveil its next Connect system with 4G LTE (hint: there's a possible wireless play here, so watch for this announcement. I can only imagine what Verizon (VZ) would charge to stream media content to a hub in your car).
- These systems will soon connect to the cloud.
- Think I've lost it completely? Remember, there are already iPhone apps from General Motors (GM) that enable car owners to open and unlock car doors, start the car and monitor fuel levels from an offsite location. The finer pieces of the connected car are being built around such aforementioned hubs in the dashboard.
The Long-Term Idea
Is it a matter of time before Apple (AAPL) conjures up something that sets a new bar in the industry, say the iCar? For years, aftermarket companies and original-equipment manufacturers have released devices that bring the power of the iPod into the car. With Apple's immense cash hoard, anything is possible. By sheer extension of Apple entering the industry, names like Broadcom (BRCM) and Corning (GLW) will go along for the ride.
But I want evidence that a large tech company has already planted modest roots supporting the connected car. Then I can begin to ponder the possibilities of furfure earnings potential. Although NVidia (NVDA) chips are prominent in existing connected car technology, it's Intel (INTC) that most sparks my interest due to its recent initiatives and the valuation of its stock (10x forward earnings with a 3% dividend yield).
Intel and the Connected Car
- Intel recently opened its Automotive Innovation and Product Development Center, located in Germany. It focuses on attracting young specialists from nearby learning institutions. I want a company in on the ground floor that lures fresh talent into an industry that will require outside-the-box thinking.
- A $100 million fund has been established to support technology and businesses that tied directly to the connected car.
As Apple dominates tech talk (at least on Wall Street ), Intel has quietly launched a new high-end server chip that offers 80% better performance than prior iterations and has won new business from Hewlett-Packard (HPQ), Dell (DELL), IBM (IBM), Oracle (ORCL), and Cisco (CSCO). Yet there isn't a lot of love for the stock, which has lagged the broader market the past month, and that fails to capture the near and long-term positives underlying the company.