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The Future of Technology - Part II


by Mark Bern, CFA

There are obviously several areas of growth ahead but three stand out in my mind: semiconductor chips and CPUs, cameras and sensors.  In the area of chips and CPUs alone there are also multiple growth areas such as autonomous vehicles, drones, AI (artificial intelligence), AR (augmented reality), cloud computing, and gaming.  There are other areas, of course, but those are where I expect the most potential growth.  The demand for both cameras and sensors is about to explode, in my humble opinion.
In 2017, only about 8% of all new smartphones had dual cameras.  That number is projected to increase to 21% in 2018 and to 53% by 2020.  On top of that, camera makers are projecting that as many as eight cameras could be included in future high-end smartphones.  Two cameras will be required for AR functions alone, another for facial recognition and another for iris sensing, and as many as four for improved photo quality (two in front and two on the back).  Then there are the cameras that will be needed in autonomous cars; probably at least six per vehicle (and it could be more due to the need to redundancies for safety).  Every drone will have one or more cameras.  I guess by now you get the picture!
Sensors are going to be incorporated into just about everything from many parts in planes and heavy machinery to kitchen appliances, pipelines, shipping containers, and even in the soil by farmers, not to mention that there will be a plethora of them in every vehicle in the future.  There will be billions of those things all around the globe collecting data and transmitting anything out of the ordinary constantly. 
Naturally, all this connectivity and data transmission will require the widespread use of a 5G network as mentioned in last week’s missive.  Autonomous cars can operate without communicating with each other but they will work better when they do, so 5G is not necessary at the outset but it will be needed as the number of autonomous vehicles increases.  Car manufacturers expect to bring autonomous cars to the market as early as 2020.  The big question is whether or not government regulations will be ready or allow them on our roads in large numbers by then.  Government will catch up but I sense that regulations could be the biggest hold up to mass adoption.
Drones are being used for more and more commercial applications.  Again, the main obstacle is government regulation at all levels.  Eventually drones will dispatched to inspect power lines after a storm so repair crews can have the information needed while still enroute to affected areas thereby reducing repair times.  Drones, in combination with sensors, can inspect pipelines for weakness before leaks occur in order to avoid detrimental spills.  Farmers can use drones and sensors to identify how much of what nutrients and/or moisture are needed in different areas of a crop field thereby reducing the cost that would otherwise occur by applying everything everywhere.  Drones will be used to inspect construction sites, progress and the quality of materials being used.  The list of uses for drones and sensors is endless.    And all the data collected will need to be sent to central processors where AI can process it all to identify problems and make improvements.  Again, the greater speed and capacity of 5G will be necessary to facilitate the future. 
All of this advancement in technology will give rise to economic growth, new types of jobs and some very interesting investment possibilities.  Instead of buying the car manufacturers one would be better off buying the manufacturers of the components that will be needed to make autonomous vehicles a reality: cameras, chip makers and sensors. 
Drone makers, mostly in China, should continue to grow but the makers of some of the components such as cameras could grow faster.  The same is true for smartphones and cameras.  The number of phones will not increase by a whole lot but the number of cameras will.  The IoT (Internet of Things) will create tremendous amounts of data, requiring huge additions to cloud-based computing power (CPUs & chips), and billions of sensors to collect the data.  The companies incorporating the sensors into their machines and appliances will only sell a few more units per year but the sensor manufacturers will see unit sales increase at dramatic rates. 
The difficult part is finding the future winners.  I prefer to identify those companies that can consistently produce superior results with a clear focus of generating strong free cash flows.  Those are usually the companies that can take best advantage of shifts in their market environment and produce reliable, profitable growth.

Respectfully,
Mark Bern, CFA
Bern Factor LLC
mark@bernfactor.com

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