Wearables were all the rage for the past few years, until they sort of just started to peter out into oblivion. In this week's episode of Industry Focus: Tech, Dylan Lewis talks with Motley Fool Canada's David Kretzmann about what he did and didn't see at the Consumer Electronics Show, and what that means about where the tech industry is heading.
Listen in to find out more about the slow death of the wearables industry, and where Apple (NASDAQ:AAPL) fits into it; the state of 3D printing (remember that?) today; why mobile payments is one of the most exciting spaces in the tech industry, along with which companies are leading the pack; and more.
A full transcript follows the video.
This video was recorded on Jan. 19, 2018.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, Jan. 19, and we're getting some updates from our boots on the ground at CES. I'm your host, Dylan Lewis, and I'm joined in studio by David Kretzmann.
David Kretzmann: Oh, yes!
Lewis: Nice to have you here!
Kretzmann: It's great to be here, Dylan!
Lewis: Nice to have you back, I guess.
Kretzmann: I survived Vegas. I'm glad I'm still in one piece. But man, it's a lot colder here!
Lewis: Our listeners are glad that you survived so you could give us your dispatches from the Consumer Electronics Show. Before we get into that discussion, you've had some role changes here at the Fool since the last time I had you on the show. What are you up to these days?
Kretzmann: Yeah, I recently switched over to our Motley Fool Canada team. We're just launching a brand-new service in Canada called Hidden Gems Canada. It's kind of a flavor of small-cap investing, Rule Breakers-style investing. Each month, we'll be recommending a Canadian company and a U.S. company that fits the bill in that small-cap growth orientation. It should be a fun product. If you're interested in checking it out, it's fool.ca/hiddengems. You can see what we're working with there.
Lewis: And you guys were at CES to get a sense of some of these new, fresh technologies, maybe some companies that are making some early investments in them, what that might look like for them, right?
Kretzmann: Yeah, absolutely. CES is a nice chance to get a sense for some emerging technologies and trends. And also, as we'll talk about, maybe some technologies and trends that have been overhyped and might be dwindling a little bit, and trying to get a sense for that whole landscape, particularly within tech and where the world might be headed over the next three to five years and beyond, and where we should be paying attention as investors to benefit.
Lewis: And you outlined your takeaways -- I think it was an eight-Tweet, 15-point thread that you put together on Twitter. If people want that, you are @David_Kretzmann, right?
Kretzmann: That's right.
Lewis: And I know you spend some time on Tuesday's episode of Market Foolery talking about your experience at CES with Chris Hill. We did our best to divide up the portions of the takeaways that we thought were interesting. I think maybe some more bullish stuff going on on that Foolery episode, we're going to talk about some trends that were absent or underrepresented today.
Kretzmann: Yeah, this one will be a little bit more of a downer. But hey, it's Friday, so we have the weekend to look forward to.
Lewis: We have that to look forward to. I think the first thing I want to talk about with you is looking at Fitbit (NYSE:FIT) and the wearables space. And with everything we're going to be talking about today, at least in the first half of the show, we're going to be looking at trends that were really big tech trends a couple of years ago, and where they are now and what happened between those, to this point where, Fitbit almost had zero presence at CES.
Kretzmann: Yeah, Fitbit was still there, but on the actual floor itself, I didn't even see a booth that they had. And compared to the last year or two, this was the third year that I've been at CES, they had a much heavier presence, where they had a big booth, they were displaying their products, really hyping up everything within that wearables space. And I think another company that was completely absent, they didn't even have a private meeting room or anything this year, was Under Armour. Compare that to last year, when not only did they have a massive booth, and they brought in Michael Phelps and a lot of their star athletes, their sponsored athletes. Kevin Plank also delivered the final keynote at CES last year, and that keynote was almost entirely talking about connected fitness category and the three acquisitions they had made within that connected app, connected fitness space. So, the fact that Under Armour went from delivering the keynote, being the star of the show, having this star-studded display, to no presence at all at CES, I think really tells you what's happening in that category.
Lewis: I think there was a 12-month period, or maybe a four-month period, where Kevin Plank was basically on the conference circuit. He was at CES, and then he was a keynote at South by Southwest as well, where I was in Austin.
Kretzmann: Oh, wow, I didn't know that.
Lewis: And I remember the same thing, where I was like, wow, this is big for them. They're seeing these acquisitions as big growth levers for Under Armour. And to see them not even be there now, it's like, ooh, this has not really been working out for them.
Kretzmann: Yeah. And we've seen that story played out over the course of 2017. I didn't realize that they were also at South by Southwest. I actually might remember hearing one of your podcast appearances talking about that. But it wasn't much longer after South by Southwest, I think it was in the summer of 2017, when they started to write off some of those acquisitions that they made. They spent over $700 million acquiring three of these connected fitness apps. So they're finally doing the mea culpa, saying, "Oops, you might have overpaid for that, we're going to start writing that off." They had a lot of leadership changes. And finally, you see Kevin Plank, someone who is, obviously, incredibly confident and a very powerful founder and CEO, basically admitting, "We made some mistakes, and we need to change gears a bit." They're still in a little bit of a mini-turnaround stage, but man, they made a huge bet on connected fitness that so far seems to be a bit of a blunder. Not really clear how they're going to make money with those connected fitness apps.
Then I think that extends to Fitbit as well, where these devices wear off people. You might buy one of these fitness trackers and use it for a couple of months, but it's not much of a repeat business. There's not really a reason that people keep going to these fitness trackers. Then, the people who really do like these fitness trackers, why wouldn't you just go with an Apple Watch, which, obviously, it's Apple, so it has that going for it, but also, the latest versions of the Apple Watch, it has the GPS tracker built-in, it has mobile data built in, just in general a better device than a lot of these other trackers that are out there. And it's Apple.
Lewis: Yeah. When you have Apple backing something, particularly on the software side, you have that app developer community as well. So, functionality is going to be a lot more robust with an Apple device than something that has a much smaller developer community.
Kretzmann: Absolutely. It's kind of puzzled me over the last couple of years, because people will point to the Apple Watch as being a flop or not doing as well as it could, but they're comparing that to the iPhone. But the Apple Watch still has over 50% share of the smartwatch category, so pretty much by any definition, it's been an incredible success. That's just a very tough competitive beast to go up against when you're a Fitbit or an Under Armour, companies that are just making these one-off devices that don't really keep consumers coming back for more in the same way that the Apple app ecosystem does.
Lewis: And you think about the presence of companies at CES, looking at the wearable space, thinking about hardware manufacturers, there's Fitbit, but you look at Jawbone, this is a company that existed and is now in liquidation, selling off most of their assets. And Pebble sold itself to Fitbit. So, of some of the other pure-play companies in that space that had a decent size to them, a decent chunk of the market, two of them aren't there anymore. So it stands to reason that you're not going to see as much of that at CES.
Kretzmann: Yeah, consumer electronics is just a brutally competitive space. It's a very tough space to build some sort of long-term competitive advantage. Apple is obviously the crown jewel, when you see a company that keeps people coming back for more. They're raising the prices on iPhones, they're launching new devices, and people are just stuck within this software and app ecosystem. I think if you're a Fitbit or a GoPro, or some of these latest consumer tech companies -- you really have to look at Garmin as an example of what could go wrong when your main product, whether it's a camera or a fitness tracker, becomes not just a product but a feature of a device like an iPhone. And I think that's really what happened with Garmin, where they dominated GPS trackers in the 2000s. The company and the stock did very well. But eventually, the GPS tracker was just integrated into virtually every device, and they lose that competitive advantage. I think we're seeing something similar happen with Fitbit, where that fitness tracker will just become a default feature in your iPhone or your smartwatch, and you don't necessarily need Fitbit for that feature.
Lewis: Another category similar to Kevin Plank's mea culpa, where they said, "We got a little overly ambitious and maybe saw a little bit more opportunity than there actually was," you think about that on the consumer side, and on the investor side with 3D printing. And people thinking about what this market might look like, and having to come to the realization over the past couple of years that either it's going to take a while or maybe it's not quite as big as people expected. What were your takeaways on 3D printing from CES?
Kretzmann: There was very little presence of 3D printing. You had a few booths. But most of the 3D printing booths that were there, they were basically just printing tchotchkes, stuff that you're not going to need. Maybe little figurines or utensils, but nothing that's really groundbreaking, certainly on a consumer level. 3D printing has bigger applications today than it has in the past with manufacturing or commercial uses. If you're in a factory or some larger-scale manufacturing facility, a 3D printer can make sense. But I guess it was about three years ago, we had Matt Argersinger and some other Fools out at CES, and that's when 3D printing was the dominant theme at CES. Matt, to his credit, was basically scratching his head, thinking, "You know, I think this could be a top." And almost to the week, it turned out to be the peak of Stratasys and 3D Systems, which, for a year or two, the stocks had been on an absolute tear. This year, 3D Systems and Stratasys didn't even have a booth signed up at CES, or private meeting rooms. That kind of tells you, again, what's happening in that category.
Lewis: Yeah, I think both of those stocks are trading around 80% down from where they were in their peaks in 2014.
Kretzmann: Very painful.
Lewis: And I know a lot of Fools follow those companies, so it has to be kind of tough. Philosophically, thinking about the 3D printing space, what is the better way to approach it? I think there were these thoughts at some point that everyone will have a 3D printer in their house. That was the illogical extreme that things got taken to. What is more realistically how people should be thinking about this space? What does that look like?
Kretzmann: I think we're still a ways off from a time where there's really a consumer need or desire for a 3D printer. Several years ago, you had people making some serious arguments that Amazon should be worried, or Amazon could be disrupted in a few years, because if every consumer had a 3D printer in their house, they upload the dimensions for whatever product they want, and they print it out in their home. What role does Amazon play in that world? I think that's a way off, if it even happens. But I think the opportunity, similar to what I said earlier, is in that commercial or manufacturing space. I think that's where you see companies continue to make orders and build a market for 3D printers. Even 3D Systems or Stratasys, those are companies I haven't followed as closely lately, but I think they're shifting more toward that manufacturing side of the equation rather than the consumer market with things like MakerBot. You have a company like Proto Labs, which is not completely a 3D printing company, they do more rapid prototyping. They're a company, if you're an inventor developing a product, you can basically send the design to Proto Labs; they'll make a small batch of prototypes for you and ship it out. So they have some similarities with 3D printing. That was a company that was really dragged down the last couple of years, along with the rest of the 3D printing space. But since then, the stock has had a huge resurgence, and I think it's at an all-time highs now. So I would focus more on companies on that end of the spectrum, and not so much companies going after the consumer market, because I think that's a way off.
Lewis: David, we have been downers so far, and that's really not what CES is about. I wanted to take a fun alternate take on the expo. But, there were some bright spots here at CES, specifically mobile payments. This is a space that has been blowing up. People that have been following PayPal, for instance, have seen firsthand just what the market opportunity looks like here. You noted that Alibaba's (NYSE:BABA) presence in mobile payments in particular was really something that stood out to you.
Kretzmann: Yeah. If you're interested in the mobile-payments space, there's obviously a lot of companies based in the U.S. like PayPal, Mastercard, Visa, that are all benefiting in some shape or form from the transition to digital or mobile payments. But you really have to pay attention to what's happening in China. One stat I just pulled up: In 2016, total mobile payments in China totaled $5.5 trillion. In the U.S., it was just $112 billion. The Chinese mobile payments volume is more than 50 times what we see in the U.S. And a big driver of that is Alibaba. Some stats that they had, Alibaba had a big booth this year, and among other things, they were showcasing what they're doing with AliPay, which is their mobile or digital payments offshoot. AliPay now has over 520 million active users, over 10 million brick and mortar merchants now accept AliPay, and that's really become a primary payment method, not just for digital payments but for payments in general in China. Their real-time risk identification takes 100 milliseconds per transaction. On Singles' Day -- which is Nov. 11, 11/11; that's a big shopping holiday in China that was created by Alibaba -- the payment processing capacity of AliPay reached 256,000 transactions per second. So they've really nailed down this mobile and digital payments platform, and the numbers that they threw out there were staggering. Anyone interested in mobile payments, pay attention to what Alibaba and Tencent are doing over in China.
Lewis: I'm curious. You said that Alibaba had this fairly large booth at CES. What does showing off mobile payments actually look like? Because that's not a consumer electronics device that you can throw in front of someone and have them be amused with.
Kretzmann: Yeah, they really just had some futuristic-looking screens that kept spitting out these different stats, so I snapped a couple of pictures, like, man, that's really impressive, what they're doing. They were showcasing a lot of different stuff, the breadth of the Alibaba retail platform, which is impressive. They had their voice assistants and smart homes, very similar to the Echo -- Alibaba really has an identical device to that. They have their own voice assistant, and then they had this mobile payments futuristic screen, the cool graphics and some of these different stats that they were throwing out.
Lewis: David, two fun questions for you before we wrap up. In my opinion, CES can be known for tech for tech's sake, the idea that we're going to innovate and ask questions later, or we're going to apply some futuristic or buzz tech-type things to standard devices, like smart refrigerators, things like that. There isn't always a direct consumer market for some of the innovation that happens there. Is there anything that you saw at CES this year where you were like, nobody's buying this, somebody sunk a lot of money into it but nobody's buying it?
Kretzmann: I mentioned to some of this to Chris on Market Foolery earlier this week. Within robotics, there's some stuff that's really cool, but then there's some where it just seems like the tech is misguided or needs a lot further to go. And that's primarily with these general-purpose robots. It seems like, these are robots that are supposed to be built to follow you around and help you with a lot of different tasks, but it seems like they're just poorly constructed and they don't do any one thing well; they just do a lot of things in a mediocre way, so it's really almost just being followed around with a 2012 tablet that you can tap on and play some games. That's really all it does. I could see a future down the road where we do have multi-purpose or general-purpose robots that can follow us around through the home and help us with a lot of different tasks in our lives. But there were a lot of these robots that were just dancing in different configurations, and I'm just thinking, I don't know if there's a clear need for that, and I think that tech still has a way to go. And there are also autonomous suitcases. These are suitcases that you don't need to pull. They're supposed to just follow you around. But I just feel like there's a lot that could go wrong with that, and the tech just seemed like it needed a way to go.
Lewis: How does that work? Do you have a token in your pocket that it tries to stay within five feet of, or something like that?
Kretzmann: I think it's tethered by Bluetooth. You hook it up to your phone or smartwatch, and it knows to stay within five feet of you. But I don't know, if you're running to a flight, I don't know if the suitcase can keep up with you. I think there's a lot of things that can go wrong at that point.
Lewis: Twenty years from now, though, we're going to be seeing the rom-com where someone is doing that last-minute dash through the airport, and they're followed, 10 feet behind them, by a suitcase.
Kretzmann: Oh, absolutely! When I mentioned this to Chris Hill, he was saying, will I be able to have a suitcase in the shape of BB-8 or R2D2? And I was thinking, that's actually brilliant. That would be something I might actually buy. You could have your own personal R2D2 following you around the airport. That would be pretty awesome!
Lewis: Personally, I'm rooting for people to figure out autonomous driving before we get to autonomous luggage. There are certain things that I'm OK carrying around.
Kretzmann: Yeah, I feel like dragging luggage on wheels isn't that big of a pain point. There are bigger issues to solve. So, I agree. Autonomous driving, let's get that done first; then we can move on to the suitcases.
Lewis: One last thing before I let you go, David. Looking at your Twitter feed right now, it's a veritable Who's Who of who is promoting a book at the moment. You met with a ton of authors while you were at CES. Any one in particular that said something that really caught your attention?
Kretzmann: There were several. Definitely check out my Twitter. There are some highlights there, and hopefully we'll be posting some of those interviews on fool.com, or I'll be sharing those out on Twitter as we get them. Some interesting ones were Steve Miller. He's a business consultant. He's written numerous books, and his latest is Uncopyable, talking about how companies in today's day and age, it's so fast-paced, a lot of different competition, how companies can carve out what he calls an unfair advantage, essentially a competitive advantage. So we spent a good amount of time talking about that. I thought an interesting point that he made, I asked him about Starbucks, how do you rank Starbucks on the scale of having an unfair advantage? And he said, if I was a competitor going up against Starbucks, I wouldn't try to make better coffee. I would try to be a better third place. Because he thinks that Starbucks' advantage isn't so much the coffee or the service; it's really creating that third place that Howard Schultz was really plugging. So I thought, that's an interesting way to look at the business landscape and how companies can create an advantage.
Lewis: The third place that you're talking about is, there's the home, the office, and then the third place. Not third place in the market share.
Kretzmann: Yeah, exactly! Thanks for clarifying that. That's important. Then I talked to Ross Baird -- he's a venture capitalist actually based here in D.C. He was talking about how the investing community today is really overlooking a lot of different places. The majority of venture capital money is allocated to three states -- Massachusetts, California, and ... what is the other one ...
Lewis: Massachusetts and California sounds right. Maybe New York?
Kretzmann: Yeah. So, essentially, three cities are getting the vast majority of VC money. Then, obviously, the majority of entrepreneurs getting that money tends to be white males. He's basically calling it the innovation blind spot, and how investors can overcome those biases and find opportunities where a lot of traditional VC or investing money is overlooking.
Lewis: Awesome. Thanks for hopping on today, David!
Kretzmann: Glad to be here, Dylan! Thank you!
Lewis: Listeners, that does it for this episode of Industry Focus. If you have any questions or if you just want to reach out and say hey, you can shoot us an email over at firstname.lastname@example.org, or you can tweet us at MFIndustryFocus. Listeners, today is actually Austin Morgan's three-year Fooliversary, so if you want to shoot him a congratulations, just shoot us a note, too, and we'll make sure that he sees that. If you're looking for more of our stuff, you can subscribe on iTunes or check out the Fool's family of shows over at fool.com/podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell stocks based solely on what you hear. For David and Austin, I'm Dylan Lewis. Thanks for listening and Fool on!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Kretzmann owns shares of 3D Systems, Amazon, GoPro, Mastercard, Proto Labs, Starbucks, Twitter, Under Armour (A Shares), and Under Armour (C Shares). Dylan Lewis owns shares of Amazon, Apple, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Apple, Fitbit, GoPro, Mastercard, PayPal Holdings, Proto Labs, Starbucks, Twitter, Under Armour (A Shares), Under Armour (C Shares), and Visa. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool has a disclosure policy.