What is a disruptive technology? As the name implies, it's a breakthrough that rattles the walls of the conventional. Technological advances, from the automobile to the microwave oven, ultimately reshape our living experience. With our new Rule Breakers newsletter singling out tomorrow's great growth stocks early in their disruptive stage, it's often more than worth your while to dig into the meat behind some of the hottest buzzwords.
RFID is something you're going to be hearing a lot about over the next few years, but what exactly is it? Well, RFID stands for "radio frequency identification." This breakthrough inventory tracking technology got a major boost back in January, when the country's largest retailers started requiring that their largest suppliers tag deliveries with passive RFID tags. Even the U.S. Department of Defense is using them.
You don't need to know the nuts and bolts of supply-chain management to understand why RFID is going to revolutionize inventory control. Unlike dormant UPC bar code labels, RFID tags can communicate with RFID readers. So companies can track merchandise in an instant.
It's not just retailers. The technology is already being embedded in everything from casino chips to household pets. While the current cost of RFID tags makes it unlikely that they will replace UPC or security tags entirely, the new technology does have some investing implications this year and beyond.
Transition for tomorrow
So where do the investing ideas lie? Rule Breakers newsletter subscribers can vouch for the fact that we're doing our best to dig up the stock winners of tomorrow. The process isn't as easy as one might think, though. Beyond the cheap chips and labels, the simple assumption is that retailers will see their margins improve due to RFID efficiency, while suppliers will have to take a hit in subsidizing the cost of the tags.
Yet between the retailers and suppliers lies a fertile investing opportunity that comes from tying the two together. Suppliers can't get up to speed with the new retailer requests by themselves. When the world's largest company -- the discount department empire that Sam Walton built -- demanded that its 100 largest providers migrate to the RFID platform this year, many of them turned to Sterling Communications to help in the required data synchronization. The only problem here is that Sterling is a subsidiary of SBC Communications
However, the second most popular choice for Wal-Mart suppliers has been Click Commerce
Following the money
All of the technology bellwethers from Intel
This does not mean that you should buy into every blue chip that knows the meaning of RFID. If anything, those moves from deep-pocketed companies should simply shore up the conviction that RFID is not going to be some passing stranger. It's here to stay.
Yet that is also why your attention should be devoted to the smaller companies that may either carve a successful niche in this booming field or find themselves acquired at a respectable premium by a bellwether.
A company like UNOVA
Think you should follow suit as an investor? You can approach RFID from many different angles, and if your appetite for Rule Breakers has been whetted, you're not the only one with a hunger for discovering the great companies of tomorrow. Not to worry, there is still time to sign up for a free 30-day trial of the newsletter.
This article was originally published on Jan. 3, 2005. It has been updated.
Longtime Fool contributor Rick Munarriz wants to slap a passive RFID tag on the future so he will always know where to find it. He does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks today.