The Internet of Things -- or IoT, a catch-all phrase for devices getting connected to the internet or another private network -- is reaching mind-boggling proportions. There are more "things" connected to the internet than there are people, and annual spending to manage this interconnected and still-expanding patchwork of electronic devices is worth hundreds of billions of dollars a year.
The IoT is a total feeding trough, and it can be difficult to sift through those companies that have a "wide moat" (those with a competitive edge over their peers) from those simply benefiting from a rising tide. Three Fool.com contributors are here to help, and think that Google parent Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG), MongoDB (NASDAQ:MDB), and Ouster (NYSE:OUST) have a wide moat that separates them from the pack.
Sometimes the best competitive advantage is a mountain of cash
Nicholas Rossolillo (Alphabet): Google is an inseparable part of the very fabric of the internet. Countless billions of web searches are made every day, and Google profits from its utilitarian tech service primarily via advertising. It isn't the sexiest business model, and it's one that has come under fire in recent years -- but it isn't going away anytime soon. As the internet and its application in everyday life evolves in the decades to come, Google will be a utility company helping govern its basic functionality.
Besides not really having any serious competition in web search itself (besides maybe Facebook (NASDAQ:FB), which dominates the social media side of the internet), Google has a mountain of cash. At the end of March 2021, it had over $135 billion in cash and equivalents, another $25.3 billion in non-marketable investments, offset by debt of only $13.9 billion. This is one of the deepest-pocketed organizations on the planet, and it's still filling up its coffers. Total Google revenue was $197 billion over the last trailing-12-month stretch and had an operating profit margin of over 25%.
Google funnels tens of billions every year into developing IoT technology -- like its Pixel smartphones and Nest smart home devices, as well as Fitbit, which it acquired at the beginning of 2021 for a meager sum (in Google terms) of $2.1 billion. More speculative investments include self-driving vehicle company Waymo and AI researcher DeepMind. Then there are IoT services like cloud and edge computing via Google Cloud, Google Pay, Google Fiber, and mobile provider Google Fi. The list goes on.
The point is, Google is using its dominant internet search engine to power all sorts of other ancillary businesses. If I had to think of only one wide moat IoT business, I think Google is as close to bulletproof as they come.
Next-generation databases for the IoT age
Anders Bylund (MongoDB): You know you have an insurmountable moat when the competitors you're disrupting are starting to copy you. It's even better if the traditionalists can't quite pin down why your groundbreaking technologies are doing so well in the market, causing their copycat ideas to miss the mark.
That's where MongoDB stands today. The NoSQL database specialist has carved out an impressive market space for itself in the massive global market for database products and services. In particular, MongoDB's cloud-based Atlas platform is winning customers hand over fist. The ultra-flexible structure of NoSQL databases makes them perfect for managing messy and unstructured data, like the sensor readings and user inputs that come from IoT devices.
MongoDB's sales rose 39% year over year in last week's first-quarter report. Atlas revenue skyrocketed 73% higher and now accounts for more than half of the company's total quarterly sales. This high-growth company is already generating positive free cash flows, setting the stage for further investments in business-boosting products and services as well as positive bottom-line earnings somewhere down the road.
At the same time, SQL database giant Oracle (NYSE:ORCL) posted just 3% revenue growth in its latest quarterly report. Cloud-based services delivered just enough growth to make up for Oracle's lost contracts in the data center. Judging by Oracle's earnings call, cloud computing is the top priority at the expense of truly forward-looking development efforts. Management spent a lot of time on discussing cloud-based service delivery but never even mentioned customer deployments of converged databases, which is the closest thing Oracle has to a NoSQL solution. That's the wrong approach.
So MongoDB's business is surging, and Oracle is just making a half-hearted attempt to keep up with the cool kids. The young upstart is stealing market share from the established competition, just as the IoT market enters an explosive growth phase of its own. Having the right database solution for this incredible target market should provide plenty of fuel for MongoDB's top-line growth in the years to come.
A new digital LiDAR company fresh off its SPAC and winning over new customers
Billy Duberstein (Ouster): A main feature of the Internet of Things is the ability for machines to detect and respond to the world around them without human direction. One technology that will enable that functionality is LiDAR, a laser-based computer vision technology just coming into its own. You may know LiDAR from its use in self-driving cars, but the technology is also applicable for smart cities, factory automation, and robotics.
Digital LiDAR company Ouster just merged with SPAC Colonnade Acquisition Corp. in March, but is already making a big impression in 2021. Although the company generates minimal revenue today, its customer base is growing rapidly. Just since the fourth quarter 2020, Ouster's strategic customer agreements have quadrupled from 10 to 40, and its contracted revenue is up over 10 times, from $34 million to $385 million. Rapid price declines in digital LiDAR, combined with a tidal wave of demand for automation applications, could mean an inflection point for LiDAR companies generally and Ouster specifically.
Ouster's advantage in LiDAR comes from a few different places. First, it has gone the digital route, which offers the potential for exponential improvement and greater simplicity versus analog LiDAR technology. The company has also chosen a single simple architecture that is configurable to each LiDAR application through software, allowing for efficient low-cost production even with customization for different end-markets.
Additionally, while other LiDAR companies appear to be very focused on the self-driving car market, Ouster is actually just as focused across industrial automation, robotics, and smart cities as well. For instance, Ouster just won an exclusive smart city contract to supply speed enforcement systems in France. These other non-auto markets may actually be much more profitable than the autonomous vehicle market, which is not only more competitive but also proving very difficult to pull off.
With a fresh $300 million from its SPAC deal, Ouster is ramping up production and accelerating its proprietary system-on-chip iteration from a two-year development cycle to a one-year development cycle. It may not be as strong a moat as in more established companies, but with a low-cost and flexible architecture, rapid speed of innovation, and large potential opportunity, Ouster may be developing into a consequential LiDAR company at the beginning of its adoption phase.