Buying clothes – or anything we humans wear – is pretty much a routine activity. The factors driving the decisions in purchases, though, have undoubtedly changed since the caveman era – will-this-clothing-protect-me-from-the-elements-while-hunting-for-food is hardly a question you ask yourself while scanning for value at H&M or Gap. Rather, the branding, the look, the feel, the color – the ‘social’ aspect, if you will, is what moves us. Hey, Maslow’s hierarchy foundation…you won. With the basic needs conquered, the focus on higher planes, aka psychological feel-good stuff, is sky high in today’s world of Instagram and constant connectivity.
Could the same technology, however, bring us back to our roots? What if our clothes and accessories actually ended up being the key ingredient to a longer, healthier life? In my opinion, the apparel of the next generation may actually have that ace up its sleeve – and possibly the ability to enhance life expectancy on a scale that hasn’t occurred since, perhaps, the discovery of antibiotics and infection management over the past century. We’re not talking about just finer cotton: data collection that could be driven through accessories and clothing could be a serious elixir for an extended, happier life. Humor me as I lay this out…
To begin, let’s talk wearables. The who? Smart watches. Fitness trackers. Cameras. Augmented reality devices. Here’s an industry that came to the spotlight barely a few years ago, on the principles of increasing internet connectivity, computing advances and an emphasis on health. It stands at roughly $8 billion in size for the first two items today, with a monthly user base of nearly 40 million Americans; projections show such devices providing nearly $25 billion in sales worldwide by 2020, with over 200 million wearables sold annually, per estimates. That’s substantial growth – but will these numbers and devices necessarily deliver to the grand vision above? Projections over the recent past haven’t exactly flattered: eMarketer had estimated over 60 million people would be wearing wearables by this year; 12 million Apple watches were sold in 2015 vs forecasts that were five times higher. Return rates have touched 30%, and data shows most buyers literally forget they own Fitbits within days of purchases.
But does this signal a need to taper down projections ahead? Absolute not, in my opinion. My optimism here comes from the potential industry expansion to include products that aren’t being talked about today – products that could be ‘converted’ into wearables, if you will, unlike fitness trackers and smartwatches, which started out as them. What am I talking about? Rings. Contact lenses. Other jewelry. Wallets. Scarves. Clothing. Socks. Shoes. If outfitted with sensors and connected through the Internet of Things, just imagine the data you could derive on your health. Correlate heart beats with the number of steps; get blood pressure through your wedding ring, relate weather conditions with perspiration and t shirts that can reflect sunlight based on your needs. Transmit all of that information to the cloud, and an absolute goldmine of data just waits to be discovered – for millions, or rather, billions of people…you could eat better, think better, sleep better, exercise better…we can go a step further and combine this with gene sequencing, and follow that up with gene editing…and therefore, create the link between hereditary conditions and your current state to diagnose symptoms and treat issues early. Smartwatches were revolutionary in terms of location-based information, data access and social expression (among so many other things). Moving forward, if you think about it, your apparel could do all of this for you. Imagine a Magic Leap augmented reality screen projecting information on your palm. Or the ability to pull up information on your contact lenses (glasses will suffice, I suppose). An ability for your ring to vibrate when it realizes you are dehydrated; and sensors indicating the need to slow down if you are stressed based on your blood pressure.
Furthermore, the potential to relay thoughts with a mix of emotions in a way similar to TARS in Interstellar, or R2D2 in Star Wars would be the next frontier; those involve physical dimensions, but deep learning based on years of data could possibly provide answers to questions such as ‘what would mom say if I did this?’ even if she wasn’t around, through a computer. Last week, Elon Musk’s Neuralink started discussing neural interface technologies, through which one could actually connect the brain with a computer, uploading and downloading thoughts. It’s hard to argue against this: the wave of wearables, and consequent computer-human interaction, is just beginning, and society stands to gain massively due to the colossal amount of data that could be derived from this sector. Of course, cans of worms around ethics and divisions in society are bound to crop up, but we’ll worry about that later. Either way, progress will prevail.
To invest in wearables, the ballgame isn’t all that difficult to find companies at first sight. The tricky part, however, is to dissect consumer habits and split hardware from software. Fitbit (FIT) is a leader in sales in the segment, but even with growth projections of over 15% for ‘17, the inability to remain top of mind (aka forgetting your trackers in the drawer) and shrinking margins has contributed to the stock getting crushed. Apple (AAPL) brings its smartwatches and services – but even yet, shipments fell 72% in Q3’16 YoY, and the stock is mainly reflective of the iPhone’s success, more than anything else. Garmin (GRMN) has held its own in the industry, through product differentiation in high end watches and focus on specific sports; the stock is up 10% over the past six months. Another classifiable wearable, GoPro (GPRO), has dramatically crashed, but one could imagine the usage of its cameras and images in other wearable applications, potentially providing new revenue streams.
In other words, this is a new sector, and while companies and investors find their bearings, note that things aren’t that bad in the near term. While 2018 growth rates are around 20% for ’17 (not too high considering the low base), millennials had a penetration rate of over 30% in ‘16, compared to the 18% for the entire population. This segment has a massive purchasing power, and a far greater obsession on health than older peers. Consequently, it is likely they will continue spending and upgrading to the latest gadgets with time, as R&D in wearables breaks new frontiers. From a connectivity and chips perspective, it’s a slightly calmer field; the usual players include Intel (INTC), Broadcom (AVGO), and Qualcomm (QCOM) through NXPI. Invensense (INVN) makes motion sensors, and forecasts are calling for a 20%+ EPS growth over the next 5 years; STMicroelectronics (STM) provide strong exposure through sensors, gyroscopes, and digital compasses. Neither of these are slam dunks – but hey, the total addressable market makes them worth thinking about when you’re hunting for your next high risk, high reward venture.
The worry with such hardware remains commoditization; Goldman research shows technology hardware prices for products have a tendency of falling 5-10% annually in the long run. Therefore, firms with data and software bring a slight premium; Under Armor (UA), a long-time favorite of mine (and substantial underperformer in the past year for so many reasons), remains alluring mainly for its focus on software – its purchases including MapMyFitness, Endomondo, and MyFitnessPal for nearly $1 billion were a clear signal regarding its connected health vision – the company already sells sensor-driven clothing and smart shoes. Look at it 10 years from now, and I’m betting there will be good returns, similar to Nike (NKE). China’s fitness tracker market now rivals the US’s size, with nearly 20 million trackers sold in ’16, including Xiaomi’s Mi band. So, the potential is gobal, spans software and hardware, and everyone’s looking for a piece of what should be an increasingly large pie. What’s noteworthy is that this is an industry where capex is absolutely not the rate limiting factor…rather, R&D drives the path ahead, and progress should be exponential in nature. I’m skeptical on models that project the growth rates of wearables or connected tech in 10 years, because they are likely to massively underestimate the value creation through byproducts (including around health, productivity, communication and physical activity). Real estimates for wearable solutions will be in trillions, not billions – similar to the entire Internet of Things wave. That’s why the TAM is massive, and we’re just getting started.
What it means for you: It’s critical to note that big data analysis, cloud usage and the Internet of Things are not mere trends. These are massive, disruptive, structural changes impacting the world on all frontiers. On this very platform arises the wearables and connected technology industry: a small one today, but one that could be life-altering as we know it a few years from now. Watch this get proven in the markets through the power of science, technology and the genius of the human mind in the coming years. Hey, health is wealth, right? Investors, take note: this is a question for which the consensus is a resounding yes – and they’re absolutely correct.
