Why Vodafone Group plc And ARM Holdings plc Can Profit The Most From The Internet Of Things

The ‘Internet of Things’, or IoT for short, has been a hot topic in the tech world for some time now, and 2015 is set to be the year that IoT technology suddenly starts to take off. 

Put simply, the IoT is the term for enabling everyday objects like fridges, telephones, cars, microwaves and even front doors to communicate with one another. Traditionally, this is known as machine-to-machine (M2M) communication and has been around for some time. Vodafone (LSE: VOD), for example, has been a world leader in the supply of M2M services for more than two decades.

However, recent technological advances such as the development of ARM Holdings’ (LSE: ARM) low-cost, low-power, high-speed microchips have made this technology more accessible.

Huge market 

The potential size of the IoT market is huge and not to be underestimated. Figures vary, but it’s estimated that there are 50 billion devices set to be connected to the internet by 2020. Forecasts show that the global IoT market could be worth $7.1trn by 2020, up from the value of $1.9trn as reported during 2013.

And this is where both ARM and Vodafone are set to benefit. Indeed, as a world-leading telecommunications company and leader in the M2M market, Vodafone’s services should be in demand as users look for IoT/M2M solutions for their businesses. 

According to Vodafone’s Global Enterprise Chief Executive Officer, Jan Geldmacher, companies that fork out cash to either develop or purchase IoT devices are now likely to see a return on investment within two years. This short pay-back period is likely to attract many businesses towards the technology.

What’s more, the rising demand for IoT devices will be a shot in the arm for Vodafone’s growth, as the company grapples with declining sales of traditional services like voice and text. If Vodafone can maintain its leading position and capture a significant share of the IoT market during the next few years, the company should have no problem returning to growth.

As a quick comparison, while the IoT market is expected to expand by around 270% by 2020, global smartphone shipments are only expected to expand 80% by 2018. 

Leading the way

While Vodafone is leading the way in M2M communication services, ARM is moving to dominate the IoT microchip market.

ARM has been diversifying its product offering during the past few months to try and draw in customers. And this diversification, along with a targeted marketing strategy — giving away free software to manufacturers of smart devices — should help the group cement its position in the IoT market.

ARM’s components are already used in 95% of the world’s smartphones, so the company has a solid base from which to grow from. The company recently announced that the 50 billionth chip containing an ARM processor had been shipped by partners. Management’s next target is 100bn chips shipped.

A key strategy for reaching this milestone is ARM’s ARMv8-A technology. A total of 27 companies have signed agreements for ARMv8-A technology. This includes all of the top 10 companies who sell application processors for smartphones.

The ARM ARMv8-A technology is designed for high-power computing, in an age where tablets and smartphones are quickly replacing PC and laptops for many tasks. This involves a jump from ARM’s traditional stomping ground of 32-bit computing to more powerful 64-bit computing. ARMv8-A processors are designed specifically for this purpose.

Huge potential 

All in all, the IoT market is growing rapidly and is set to be worth $7.1trn globally by 2020. ARM and Vodafone are both well placed to grab a share of this market. If the two companies can grab even a low single-digit percentage of this market, earnings will surge. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.