Can SingTel Profit From an Emerging US$309 Billion Industry?

The Internet has come a long way since its conceptualization decades ago. Since then, the ways to get connected have been growing and in recent years, even accelerated with the popularization of smart devices (like the smartphone you have in your pocket now).

Here’s a fun fact: although the first iPhone was only introduced a little over seven years ago, Singapore already has a stunning 87% smartphone penetration rate, according to a study by Nielsen.

That said, there are still plenty of “things which are still offline” which have yet to be brought online – like the sofa I am sitting on now.

This is where the emerging industry of the “Internet of Things” (IoT) might come in. According to research firm Gartner, the industry is estimated to generate an incremental revenue of US$309 billion in 2020.

However, what is this “Internet of Things”?

To help with that, my US colleague Simon Erikson wrote a primer on IoT on last month. The current iteration of the IoT involves data collection, data transmission and finally, data interpretation. In this case, one key element is on how machines and machines are able to “talk” to one another and from the ‘conversation’, useful insights and information can be gleaned which can then be further analyzed. This element is referred to as machine to machine (M2M) communication.

The Internet of Things in Singapore

At the local front, companies such as Singapore Telecommunications Limited (SGX:Z74) and Starhub Ltd. (SGX:CC3) are looking for a foot in the door of the IoT industry. Singapore Telecommunications may be better known as SingTel to the public.

SingTel has been offering a suite of products which feature M2M communication. Among its offerings is a M2M SIM card designed to support transmissions between machines. The applications include video monitoring of vessels in the oceans, or human traffic flow within a supermarket. The company offers to provide insight for security as well as consumer behavioir from the data it collects. A YouTube video here explains more.

On the revenue side, I have not been able to find an explicit breakdown of the M2M contribution at Singtel’s website. The M2M initiative is currently housed under the company’s Group Enterprise revenue segment which pulled in S$6.4 billion in sales for the financial year ended 31 March 2014 (FY 2014). For context, Singtel’s revenue for that year was S$16.8 billion.

In all, the telecommunications company could certainly use some help from new industries, especially when its total revenue had dropped by 7.3% in FY2014. Meanwhile, its share price has only returned a capital gain of 19.5% from 7 September 2009 to 3 September 2014. This falls behind the 26.2% capital gains for the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), for the same time period.

Foolish bottom line

The IoT industry is still in its early stages and developments may not even be widespread for many years to come. Further, it remains to be seen on how the competition in the industry develops both locally and overseas, and on how this can be profitable for companies like SingTel and Starhub.

That said, the IoT industry is still worthwhile to consider given that it has attracted the attention of global technology giants like Google, Apple and Facebook. Given how fast the smartphone trend has been able to spread in the past seven years, the pace of technological change in the realm of IoT might even be underestimated.

To discover local companies which might profit from the growth of this IoT thingamajig, we may want to focus on how the key competitive elements for the IoT are being developed within a locally listed company. These elements may include cloud based computing and big data analytics.

But for anyone tempted to jump in with two feet, my fellow Fool David Kuo might have summed it up in the best way by saying (emphasis mine):

“When we buy shares, it is crucial to weigh up each stock on its merits. If the advantages are not readily apparent, then it could be better to wait until it does.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Google and Apple.