It's not often you hear about a $15 trillion business opportunity, but the folks at General Electric (GE 0.68%) have been kind enough to give investors a clue about what they've identified as the Industrial Internet. Beneath this seemingly boring name is the idea that the global industrial system, advanced analytics, and the Internet are all converging, paving the way for the next great leap in productivity gains. After the original Industrial Revolution and then the Internet Revolution, GE believes the Industrial Internet will become the third wave of productivity gains the world is about to experience.
At this very moment, the world sits at the dawn of a new era of innovation and change, promising to deliver up to $15 trillion of global GDP growth over the next twenty years. To put that number in perspective, that's the size of the U.S. economy today. Many industries are seen benefiting from the power of the Industrial Internet, including aviation, rail transportation, health care, power generation, and oil and gas development. The Industrial Internet reaches so wide that it captures 46% of today's $70 trillion global economy.
Image source: Getty Images.
Given the vast scope of the Industrial Internet, the areas to invest are so large it's almost overwhelming to know where to focus. Being that I'm a technology investor first, I'll be looking at which technology companies could benefit from the Industrial Internet Revolution.
The data funnel
As I hinted earlier, the Industrial Internet brings the digital world to the industrial world by connecting machines with more low-cost sensors and instruments to collect and ultimately analyze new mountains of data. Multiply this approach across an entire fleet, or better yet, a sector of the economy, and we are talking about gaining tremendous insight to improve operational efficiencies.
Source: GE (link opens PDF).
If these insights lead to 1% industrywide savings, billions of dollars will be saved. When there's a gold rush opportunity like the Industrial Internet, the proverbial "picks and axes" will make a fortune. In this context, it's big data collection and analysis that become the goldmine opportunity.
Oracle (ORCL 2.02%) gives you the entire package and trades for a good price. Not only does it offer big data analytics, it also provides the entire suite of hardware and software to help make a large-scale enterprise run more efficiently. Having just reported earnings growth of 24% since last year, Oracle continues to deliver the operating results you would expect from this well-oiled machine. For the quarter, operating margins improved 3% to 38%, a figure that's 10% greater than its rival, SAP.
Oracle shares are trading at 16.9 times trailing-12-month earnings, offering a 14.2% discount to its five-year annualized historical growth rate of 19.3%. Analysts expect Oracle to grow its earnings by an average of 12.1% per year over the next five years. If analysts have it figured correctly, this would make Oracle overvalued by 28.4%, which seems completely off the mark for a company that has a strong history of above-average earnings growth. In the last year, for example, Oracle averaged 17% earnings growth. While that's below its five-year average, I do not believe earnings growth will decline as much as analysts expect, given the prospect of the Industrial Internet, and what that means for both enterprise software growth and big data analytics.
Perhaps you've heard of International Business Machines (IBM -1.05%) and its supercomputer named Watson. It was built to form hypotheses based on probability, but the kicker is it understands the imprecise nature of natural language. To showcase its skills, Watson made an appearance on the television show Jeopardy! and went on to beat the best two players ever. Watson was loaded with 200 million pages of structured and unstructured data (including all of Wikipedia), but was not connected to the Internet.
What's important for investors is that this supercomputer can handle "unstructured data," a buzzword to mean it doesn't fit nicely into a database. While not exactly a brain, it's pretty darn close because it can learn subjects over time that will improve its analytical ability. This seems like the perfect tool for an undertaking as large as the Industrial Internet. The applications for this type of technology are near infinite. Watson is currently enrolled to become an oncologist for health care giant WellPoint, and a financial guru for Citigroup.
In terms of valuation, IBM shares are currently trading at 14 times trailing-12-month earnings, representing a 18.6% discount to its 16.6% five-year annualized growth rate. Given the prospect of Watson having the power to change the world, and add in the Industrial Internet for good measure, it's pretty safe to say that IBM has high investment potential.
Because all of this data needs to go somewhere, what better place to store it than with data warehousing expert Teradata (TDC 0.16%)? Incorporated in 1979, Teradata has been involved with big data since before Nintendo Entertainment System was hot on the scene. If you're looking for the pure-play data-oriented investment, Teradata is it. The business focuses primarily on data warehousing, big data analytics, and business applications, which together provide actionable intelligence.
The problem with Teradata is its valuation. It trades as if it's growing earnings a lot more than its 14.1% annualized five-year growth rate. Based on its trailing-12-month P/E of 26.6, Teradata shares are currently 47% overvalued from where I'm sitting. Even with shares off over 22% from its 52-week high, expectations are still lofty that big data is going to deliver big returns.
NVIDIA (NVDA 6.18%) comes in to help crunch the data. Its Tesla line of GPUs was born for supercomputing, engineering, and other resource-heavy applications. The Industrial Internet revolution could create a significant demand for raw computing power, directly benefiting NVIDIA's position. As it currently stands, NVIDIA's chips are found in 13 of the top 100 supercomputers in the world, two of which are in the top 10. Couple this with the fact that its Tegra line of mobile processors are already benefiting from the smart-device revolution, and it could become a winning investment over the long term.
But like Teradata, it's hard to justify the valuation at these levels. Shares are currently trading at 15.7 times trailing-12-month earnings, and earnings growth over the last five years averages out to 4.3%. However, NVIDIA is sitting on $5.50 per share in cash, representing almost 44% of its share price. Take that out of the equation and its trailing-12-month P/E drops to about 6.9. Although shares are still technically overvalued relative to its growth rate, NVIDIA would be undervalued compared to the industry. It will take some sort of catalyst to unlock this value. Perhaps the Industrial Internet could fit the bill?
The future is nigh
The Industrial Internet deepens the relationship between machines and the digital world, holding the potential to transform both global industry and daily life. It holds promise of stronger economic growth, higher-paying jobs, and raises the standard of living along the way. If the Industrial Internet delivers on this promise and productivity rises back to its peak level of 3.1% experienced between 1996 and 2004, GE predicts U.S. GDP per capita will rise from $50,000 today to $86,500 by 2030. In today's dollars, that's a gain of $20,000, or 40% of today's GDP per capita. They weren't kidding about that whole "productivity is the ultimate driver of economic growth" thing.
I've given you some ideas of how you could focus your portfolio from the standpoint that data demands are going to explode as a result of the Industrial Internet. However, if the Industrial Internet becomes a $15 trillion opportunity like GE believes, I've only scratched the surface of investment ideas. Considering how GE invests in aviation, power, health care, rail transportation, and oil and gas, perhaps GE is the best Industrial Internet investment around? After all, GE coined it.
