In November, General Electric (NYSE:GE) convened its fifth annual "Minds + Machines" event in the heart of tech country, San Francisco. This was the company's chance to highlight how far it's come in its quest to reinvent itself as "the digital industrial company" and share its outlook for the future.
There was a lot of information in the presentations for investors, as a lineup of bigwigs from not only GE, but also tech industry partners Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) unveiled products and plans for this emerging sector. Here are the top investor takeaways.
Digital is already paying off
Vice President and Chief Technology Officer of GE Digital Harel Kodesh opened his presentation with a joke:
Boy, what a difference the years make. You know, I remember two years ago, I was interviewing with Jeff Immelt, and I half-jokingly said said that in five years, people will be thinking of GE as a software company that also builds jet engines and MRI machines. And I think I was a little bit too conservative, because it's really coming together.
He may have been joking, but he's not exaggerating. Today the company boasts of having used its Predix software platform to manage "smart buildings in San Diego, gas trains in Dubai, ships somewhere over the North Atlantic, factory automation in the central U.S.," and optimizing the U.S. rowing team in the Rio Olympics...just for fun.
Services -- including software and analytics -- tend to be much more profitable than manufacturing. GE doesn't break out its profit margins on equipment vs. services in its reporting. But in 2014, CEO Jeff Immelt revealed in a presentation that GE's industrial services had about a 30% profit margin. That's more than double the company's overall operating margin, which was only 14.2% that year.
And the digital services revenue should come in even faster as GE ramps up its efforts. "This year, we have onboarded 19,000 developers," said Kodesh. "We will exceed the number we set for ourselves -- 20,000 -- by the end of the year. ... It's red hot." That's good: it means these efforts will pay off even sooner for investors.
Living on the edge
When it first launched, Predix was just a cloud-based operating platform. Once apps were developed for the platform -- apps to analyze data from or to operate GE's industrial machinery and systems -- those apps could be selected by a customer and run. That's good as it is, because it creates an ongoing need for GE's operational and analytical software. But now, GE is taking it to the next level with what they're calling "edge technology."
Edge technology involves installing a Predix-enabled "edge device" -- a sensor, for example -- on a piece of industrial equipment. The sensor sits on the "edge" of the cloud, relaying data from the equipment to the cloud, and then pulling analysis from the cloud to give feedback to the equipment's operator or to make adjustments to the machine's operations directly.
Of course, this is of limited value if your facility can't access the cloud. That's why GE has partnered with Microsoft to make Predix available through Microsoft Azure. Microsoft is also leading the global rollout of Predix, which it is uniquely qualified to do. As Microsoft's Kevin Dallas boasted at the Minds + Machines conference, Microsoft has an "enterprise-grade hyperscale cloud" in 38 regions across the globe -- more than Alphabet's Google and Amazon combined.
With its global industrial equipment business, global access to the cloud is vital to GE for successful development of Predix. It also should be a valuable asset to Microsoft, if GE can execute its plan to make Predix the dominant platform for the Industrial Internet of Things.
Unlike an equipment sale, which ends once the machinery is delivered and the bill is paid, the sale of an operating system and analytical software -- particularly a cloud-based system -- requires ongoing interaction. GE is hoping to exploit this to establish long-term relationships with both its customers and business partners.
For Microsoft, the relationship is not just one of service provider and client. As a result of its partnership with GE, Microsoft has begun to move beyond providing software "as is" and is now receiving a lot of interest from its industrial customers in creating custom software for their devices.
Intel is both a GE customer and a partner: It is not only working with GE on building out its industrial internet capabilities, but also uses Predix to operate its plant in Chandler, Arizona. And according to Marcus Kennedy, Intel's director of commercialization for industrial solutions, the choice to partner with GE was very simple: Intel realizes that the Industrial Internet of Things is going to look very different from the consumer Internet of Things, he said. Kennedy asked, "Who better to partner with on the industrial internet than someone who's been in the industrial space for more than 100 years?"
This is a big advantage for GE as it continues to grow its digital capabilities. It starts with a massive global footprint, deep pockets, and a very powerful industrial brand. It can use these advantages to leverage support from major tech partners like Microsoft and Intel, which in turn benefit from getting in on the ground floor. And by making these investments early and ramping up quickly, GE has an excellent shot at becoming the dominant player in the space. As Kodesh remarked, "We are emerging as the only solution for the industrial ecosystem."
It's very clear that GE's efforts to become "the digital industrial company" are more than just lip service. The company has invested heavily in the technology and is hiring the developers and making the strategic partnerships necessary to make its digital efforts a success. These investments are already bearing fruit in the form of clients and revenue.
In spite of all these new developments, though, GE's stock has barely budged, up less than 2% so far this year and up only 18% over the past three years. If you believe that GE can successfully execute its plans and build a $15 billion software business by 2020 -- and the evidence certainly suggests that it can -- the stock looks underappreciated by the market. Investors should expect good things from GE Digital in the coming years.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Bromels owns shares of GOOG, GOOGL, AMZN, and MSFT. The Motley Fool owns shares of and recommends GOOG, GOOGL, and AMZN. The Motley Fool owns shares of GE and MSFT. The Motley Fool recommends INTC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.