Wearable electronic devices that are used for health and leisure purposes are proliferating among global consumers. Successful wearable designers and component producers, as well as IT security firms and third party users such as health insurers could be among the beneficiaries. Increasing consolidation in hardware could presage greater emphasis on wearable software development. More broadly, tech stocks could be strong relative performers in the current low growth, low inflation market environment.
Wearable technology is set to alter many areas of life – from healthcare, to retail, media and communications. Businesses involved in the production of devices, software, data storage and security stand to benefit, as do non-tech businesses which can devise ways of leveraging the technology.
THE WEARABLE FUTURE
The wearable tech market is experiencing significant levels of growth (Chart 1). Global shipments of wearable devices for the first quarter of 2015 reached 11.4 million units, up by 200% on the same period for 2014.1 Of those 11.4 million, 7 million were fitness bands, a product category which is expected to fuel future growth of the wearables market. Analysts anticipate that the growth rates of wearable devices will continue, potentially outstripping both phones and tablets in the future.
In order for the market to continue to grow, devices must be a central part of the move to a system of intelligence combining big data, cloud storage and analytics, delivering insights to users at the right time. Devices must be designed with the end user’s needs as the focus – a process known as ‘human-centred design’. If this can be done, wearables could soon become an integral part of everyday life. Some of the most interesting wearable investment opportunities now relate to hardware, software, data security and end users in non tech sectors, such as health insurers.
Source: Statista, 2015. Data for 2015-18 are estimates.
The applications for different wearable devices span many sectors, with an estimated 336 wearable devices on the market to date.2 The average price is just $298, meaning that devices are relatively affordable. In PwC’s 2014 wearable tech survey, healthrelated content tops the list with regards to what information and insights US consumers want their wearable devices to collect and provide (Chart 2, next page).
Businesses are developing wearables that aim to make living with certain illnesses and conditions more manageable. For example, the ADAM (asthma detection and monitoring) wearable patch detects symptoms and, via an app connection, monitors inhaler use and provides warning of impending asthma attacks – sending important data to a patient’s doctor. Dealing with diabetes is set to become more manageable, as new wearables remove the need for taking blood. Systems such as the FreeStyle Libre detect blood sugar levels via a patch attached to a patient’s skin; each scan gives a current glucose reading, the last eight hours of glucose data and an arrow showing the direction the user’s glucose is heading.
Devices can monitor an enormous range of bodily data – from heart health to sleep patterns and activity levels. Increasingly, devices are advising users on suggested lifestyle adjustments.
The research potential is also significant. Since the start of August, volunteers in the UK have been taking part in one of the largest medical studies ever conducted – linking their wearable devices to an iPhone app, ‘MyHeart Counts’, which uploads their information to a heart disease study at Stanford University in California. 41,000 Americans are also taking part, and the researchers want to turn it into the largest study ever conducted into the link between physical activity and heart disease.3
USING BIG DATA
As noted by the founder of health business LifeQ, the future of wearable technology is to a very large extent about what can be done with collected data.4 The growth of the ‘Internet of Things’ is adding to this vast data pool – with everything from cars to fridges and thermostats producing data which may or may not hold valuable insights for businesses. Arguably, data analytics is the most important opportunity in software over the next decade. Providers of enterprise application software like Salesforce.com and Qlik Technologies, alongside established business intelligence firms like Oracle, Microsoft, IBM and MicroStrategy could be among the main beneficiaries.
Similarly from a hardware perspective, investors should consider microchip processors as a form of exposure to the wearables market (case study, right hand margin). Consolidation in the chip manufacturing industry should be good for long-term pricing.5
The demand for health wearables is reflected in sales, where fitness and activity trackers are leading the way in shipment volumes of wearable devices. Chart 3 shows that through the first quarter of this year, fitness bands made up over two thirds of the market share, led by Fitbit and a new entrant to the market, Xiaomi.
However, the fitness bands’ share of the wearable market is expected to decline following the launch of the Apple Watch this year. The greater functionality of smart watches over fitness bands could appeal to a wider market than those interested purely in fitness, as the Apple Watch measures similar fitness metrics, but has more applications for use such as travel apps, news, calendar management and phone calls. Some analysts expect fitness bands’ market share to contract from 36% in 2014 to 20% in 2019.6 The launch of Microsoft’s ‘HoloLens’ next year could also contribute to a shift in market leadership away from ‘basic’ wearables, towards ‘smart’ ones.
However, the Apple Watch’s and Fitbit’s consumer bases are dissimilar, as they serve different functions and come with very different price tags (Fitbits range from US$75-$300; Apple Watches from around $550 to over $15,000). According to Slice Intelligence, less than 5% of consumers who have bought a Fitbit since the end of 2013 have also purchased the Apple Watch. So both products could continue their upward growth trajectories. And while Apple has made a big effort at marketing its first new product category since the iPad, Apple Watch sales do not seem to have met expectations7 – though it is early days for this product.
Source: PwC 2014 survey
Source: IDC June 2015
The health insurance market has already adopted use of many wearable devices, providing free fitness bands to track and reward healthy living decisions in the form of reduced premiums (case study, right hand margin). Companies such as UnitedHealth Group, Humana, and Cigna have all created programmes to integrate wearable gadgets into polices. This is making health insurance more efficient by increasing fairness in premiums, and rewarding those who make healthy decisions.
BUSINESSES: MAXIMISING EMPLOYEE PERFORMANCE
Firms from finance to industrials and manufacturing are distributing wearables in order to maximise employee performance. BP has distributed over 24,500 Fitbit fitness devices so far this year to workers in its North American business. Body-worn devices are helping to streamline logistics processes, removing the needs for clipboards and check-in sheets. Amazon’s warehouse workers are using GPS trackers to inform them of the most efficient route to collect and deliver items. Trader’s heartrates and stress levels are being recorded, to help them better assess whether they are in the right mental and physical state to trade. At Epicentre in Stockholm, things are being taken further, with some workers opting to have a microchip implant, so removing the need for key-fobs and cards.
Manufacturers are using XOEye’s industrial smart glasses in order to solve problems in the workplace. The smart device records HD video and relays it to an offsite location, where a specialist can guide workers remotely during complex tasks. In industries that involve high-risk roles, such as mining and oil and gas, wearables can play a critical safety role. Rio Tinto’s truck drivers have been given smart caps that have fatigue-detecting sensors embedded, so helping prevent accidents.
RETAIL AND ADVERTISING
Wearable technology is set to become an integral part of a consumer’s retail experience. Consumers want their wearable devices to make shopping more enjoyable – with personal deals, contactless payments and improved loyalty reward schemes. Smart watches are expected to play an important role within the retail sector, largely through mobile payments (already growing at a steady rate, as shown in Chart 5) and delivery of active cues such as targeted deals based on browsing history, current locations and body measurements, such as dehydration and vitamin levels.
On the other side of the till, wireless headsets, wrist displays and technological ‘lanyards’ – strips of ribbon that hang around a wearer’s neck – are being developed which will enable employees to access live information regarding stock levels and deals, meaning they should be able to provide a better and more efficient service to consumers. Virgin Atlantic trialled Google Glass at London Heathrow airport, so that employees can deliver a more personal service. Google Glass informs staff of passenger names, flight status, local weather and events at their destinations, and also translates foreign language information.
Source: Statista, August 2015. 2015-19 numbers are estimates.
ENTERTAINMENT, MEDIA AND COMMUNICATIONS
These sectors are predicted to grow substantially over the next four years (Chart 6). Wearable technology is expected to be a substantial contributor to this growth. Relevant news, information and targeted content will be shown on devices such as glasses (as made famous by Google, see right side margin case study) and watches.
Wearable technology is set to make gaming more physically and visually immersive, by eliminating the need for controllers. The majority of games consumers are more technologically advanced than the average consumer, so provide an interesting target group for the wearable technology market.
Headsets are leading the way in wearable gaming development, with the Oculus Rift and Razer’s Open-Source Virtual Reality ecosystem offering consumers an immersive gaming experience. Bodysuits, such as the Tesla Suit, will be fully compatible with existing virtual reality headsets as well as consoles.
Social media is fast becoming a core method of communication, and a way in which consumers receive and distribute information. Wearable technology will allow users to gain real time information and communication updates. Voice-recognition software could soon become standard on wearable devices connected to social media, allowing a more conversational, real-time flow of communication.
Source: Statista, August 2015
Interest in wearable technology has tended to focus on hardware – the actual watches, lanyards, glasses and so forth which people wear. However, increasingly it looks as if the sector is consolidating after the initial phase of devices from a variety of producers coming on the market. One Forrester analyst predicted that within a few years, 80-90% of current brands will be gone.8 Nike was a high-profile departure from the hardware market last year – laying off most of the engineers working on its FuelBand device.
Nike is now concentrating its efforts on its fitness apps, such as running-tracker Nike+ Training Club, which is used on Apple and Android devices without the need for a Nike wearable. Similarly, the Google Fit health tracking platform runs on Android without the need for a dedicated Google hardware device. Apple’s HealthKit app has some level of integration with third-party devices such as RunKeeper, though full integration is still lacking, and appears to be hampered in part by device makers’ unwillingness to easily allow users to export data to a rival platform.
However, such unwillingness could be short-sighted in the long run, as most people will probably not want to wear lots of different devices catering to a variety of needs. Combining capabilities and different software into one device looks more promising in terms of longer-term usability, emphasising the importance of software development and cross-platform capabilities.
CHALLENGES FACING WEARABLE TECHNOLOGY
The practicality of existing wearable offerings points at broader challenges facing the market, such as concerns over legal issues relating to photography without consent when Google Glass was trialled. Furthermore, Fitbit had to recall some devices due to users complaining of irritation to the skin from wearing the wrist bands. Use and storage of personal data collected by wearable devices is another issue – especially as cloud data can be an easy target for hackers. But there is opportunity in adversity for investors if they can find IT security companies which can profit from increasing spending on security by wearables producers (case study, right side).
The IT security sector has been outgrowing the software sector recently, on account of enormous demand growth for security to match the proliferation of internet-connected devices in recent years and the development of cloud storage. Cyber security stocks appreciated by an average of more than 60% from June 2014 to early March this year – comfortably outperforming the broader market. Stock prices in the sector have pulled back since then, and careful balance sheet analysis will likely be important when assessing possible opportunities.
Wearable technology has some barriers to overcome in terms of security, perceived ugliness of devices9, and people’s reluctance to submit to constant technological supervision. PwC released a recent report10 on the state of the wearables market, featuring stories highlighting a possible wearable utopia – where the technology is seamlessly blended into people’s lives, enhancing their health, leisure and work experience – versus a dystopia, where people come to resent the intrusion of advice and demands into their lives.
As PwC note, ‘human-centred design’ – shaping capabilities entirely around the customer or user experience, rather than forcing users to adapt to their devices’ demands – will be critical for the success of wearables. Many of the devices that are currently on the market lack this human-centred element. But investors have opportunities for gains if they can find companies that are developing products and services that complement people’s desire for self-improvement and entertainment, without becoming ‘nagging’ devices.
More broadly, investing in innovation is arguably the best way of escaping the low growth environment of ‘secular stagnation’ which seems to be enveloping global markets, given the weak demand/excess supply dynamic affecting other equity sectors, and the persistently low yields on offer from fixed income investments. Successful innovation investments in tech, healthcare or media – with wearables encompassing all three sectors – could offer strong returns in the years ahead.
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