Buy Into the Smart Machine World

08/07/2012 8:45 am EST

Focus: STOCKS

Everything is getting smarter, and it's a good idea to put some money into the companies that are allowing our machines to make life easier, with us or without us, writes John Persinos of Personal Finance.

The personal computer, the cell phone, and the Internet revo­lutionized the way we live and do business. We’re now on the cusp of another paradigm shift: Machine-to-Machine (M2M) technology.

M2M devices communicate with each other through a central server, without a human being as intermedi­ary. They use sensors to transmit valu­able data—such as fuel levels, room temperatures, or inventory capacities— through a wired or wireless network to a software application.

The software application translates the data for meaningful action. For example, if the data exchange indicates that a refrigerated locker is getting too warm, the system will make a temper­ature adjustment—automatically and without a person getting involved.

M2M remotely connects a wide va­riety of machines into a complex com­munications matrix. Major applica­tions today include utility meters, fuel tanks, vehicle fleets, point of sale scan­ners, and medical instruments in a hospital. M2M also automates the de­livery of services and billing, making them more efficient and cost-effective.

During the last decade, M2M “smart meters” have transformed the utility industry. Technology research firm IDC predicts that shipments of smart meters to utilities will grow nearly 112% by the end of 2012 compared to 2011.

Under conventional technology, a re­mote network of machines sends data to a centralized hub for human analysis and action. M2M not only elimi­nates the flesh-and-blood middleman; it also fosters an integrated web of networks that can communicate with smartphones and other mobile devices. M2M networks dramatically reduce the cost, time, and energy required for data transfer, opening new opportunities for businesses—and investors.

What’s more, the M2M sector is still relatively new with huge opportu­nities for future growth, as the use of mobile telecommunications explodes around the globe.

The purest play on this trend is Digi International (DGII), head­quartered in Minnetonka, Minnesota. Founded in 1985, Digi is the pioneer in the creation of M2M devices and platform solutions. Digi also provides the most sophisticated line of cellu­lar gateways specifically designed for M2M applications.

By using the company’s products, businesses or government agencies can connect electronic devices from any remote location via a public online connection, Virtual Private Network (VPN), the cloud, satellite network, or cellular carrier.

Among the company’s key offerings is the iDigi Manager, an end-to-end solution that liberates the customer from maintaining an in-house infra­structure. All of the system’s com­ponents, such as gateways and radio frequency routers, are provided in a ready-to-go, turnkey package.

The iDigi Manager is offered on-demand, which means customers only pay for services as they use them, resulting in significant cost savings. The iDigi Manager is a proprietary and unique system that maintains an account of each device’s perfor­mance and connection status, mak­ing it fast and simple for customers to tap into all information relevant to their subscriptions.

The Cloud’s Silver Linings
The company’s iDigi Manager is the world’s first ready-to-use cloud computing platform for M2M net­work management.

The cloud is web-based computing that allows orga­nizations to enhance IT capabilities without creating infrastructure, hir­ing new personnel, or buying software. The company’s product uses the cloud to weave all of these communications strands into a seamless fabric.

Tech research firm Yankee Group expects the number of cellular connec­tions in the US dedicated to M2M applications to nearly triple over the next five years. Cellular carriers are embrac­ing M2M, because carriers can offer it as part of a cellular package to both customers and businesses.

By getting onto the M2M bandwagon, carri­ers serve as the data carriage, garner­ing a fee for transmitting information to and from the remote devices. Some cellular carriers already offer M2M services, and their number is growing.

Digi has emphasized M2M since the company’s inception, a focus that has given it technological dominance and a jump on future competitors. What’s more, the stock is now selling at a bargain. Digi’s earnings results for the third fiscal quarter of 2012 disappoint­ed analysts and pushed down the stock, but secular trends remain in the company’s long-term favor.

On July 26, Digi reported third-quarter earnings of $2.3 million, compared to $3.6 million in the year-ago com­parable quarter. Third-quarter revenue was $47.6 million, compared with $54.3 mil­lion for the same quarter a year ago, a decrease of $6.7 million, or 12.3%. Third-quarter operating expens­es were $23.2 million, or 48.7% of revenue, compared to $22.6 mil­lion, or 41.6% of revenue, in the year-ago quarter.

Lower revenue in the third quar­ter resulted from diminished sales of legacy products that the company is now updating for rollout in 2012 and beyond.

In March, the company announced a partnership with Wind River to deliver Digi’s new family of cloud-connected wireless M2M solutions. Dubbed the M2M Solution Build­er kits, these offerings will include a combination of hardware, software and cloud connectivity.

Wind River, a wholly owned sub­sidiary of Intel (INTC), is a world leader in embedded and mo­bile software. According to IDC, in­telligent M2M systems will account for more than one-third of the vol­ume of all embedded systems world­wide by 2015.

Digi’s stock is now trading at a price-to-earnings (P/E) ratio of about 26, slightly lower than its industry group and an attractive valuation in light of its growth prospects. Digi In­ternational is a buy up to $14.

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