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Connected Cars Are Moving Into the Fast Lane

1 April 2015 in Trading Ideas

At the beginning of 2014, data connectivity in automobiles was largely an idea on the cusp of reality for mainstream consumers. A Time.com article proclaimed “Your Car Is About to Get Smarter Than You Are,” and said that the summer ahead would see the release of a fleet of new vehicles that aimed to make web services a seamless part of the driving experience.1

“These new vehicles will make it easier to listen to Internet radio, get social media updates and download car fixes,” the article said. “One day they’ll even drive themselves.”

While driverless cars aren’t quite yet populating America’s roadways, Web-based technology has quickly become a significant part of car-purchasing decisions. In fact, as Motif CEO Hardeep Walia recently mentioned in an appearance on CNBC, 39% of Americans pick technology as their No. 1 criteria when buying a car.2

This new Web-enabled experience is part of the overall “Internet of Things” movement, which is expected to total 5 billion connected devices this year, according to a report earlier this year by technology firm Gartner.3

Automobiles are expected be a major driver, with one in five vehicles having some sort of wireless network connection by 2020, accounting for more than a quarter of a billion cars on global roads, Gartner said.

“The connected car is already a reality, and in-vehicle wireless connectivity is rapidly expanding from luxury models and premium brands, to high-volume mid-market models,” said James Hines, research director at Gartner.

While the majority of connected cars, at least in the early stages, will be a car-to-mobile connection, Gartner expects this network to expand eventually to vehicle-to-vehicle and vehicle-to-infrastructure connections.

Part of this growth will be fuelled by legislative initiatives. In the EU, for example, all cars will be fitted with an eCall-equipped chip by 2018 that will automatically contact the nearest emergency center in case of a collision.

For investors, this means opportunity may exist for investors within a growing industry of companies which Walia called the connected cars’ “arms dealers” – the supplier of semiconductors and other technology building blocks used to enhance data connectivity.

The Connected Car motif, a portfolio of 26 such companies, has gained 11.5% this year. In that same time, the S&P 500 has risen 1.8%.

Since the motif’s inception in October 2014, it has increased 24.2%. The S&P 500 is up 8.8% in the same period.

According to a story on the Telegraph’s web site, a recent report from McKinsey found that the “dramatic increase in vehicle connectivity” that is “transforming the automotive sector” could boost the value of the global market for connectivity components and services to $184 billion by 2020, more than five times higher than today’s $32.5 billion.

The study, for which almost 2,000 new car buyers were surveyed, also found that 13% of people would immediately rule out buying a new car without internet access, while more than a quarter already prioritize connectivity over features such as engine power and fuel efficiency.

A similar study by Telefonica of more than 5,000 people cited by the Telegraph found that half of consumers would consider connected features a key part of their next car purchase, with 70% of people interested in using or already using connected car services.

It’s that trend in customer demand that has investors hopeful for a smooth ride when investing in connected car stocks.

1Victor Luckerson, “Your Car Is About to Get Smarter Than You Are,” time.com, Jan. 7, 2014, http://business.time.com/2014/01/07/your-car-is-about-to-get-smarter-than-you-are/, (accessed March 30, 2015).

2“How to Invest In the Connected Car “(video), cnbc.com, March 23, 2015, http://video.cnbc.com/gallery/?video=3000363909, (accessed March 30, 2015).

3Lauren Davidson, “How connected cars are driving the Internet of Things,” Jan. 27, 2015, http://www.telegraph.co.uk/finance/newsbysector/industry/engineering/11372205/How-connected-cars-are-driving-the-Internet-of-Things.html, (accessed March 30, 2015).

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