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When news broke on Jan. 13 that Google (NASDAQ:GOOG) would acquire Nest for $3.2 billion, most stocks with any exposure to the connected home market surged.
If you haven’t yet heard of the “connected home,” it is a term that describes a home in which appliances, electronics and other accessories are connected and controlled over the Internet.
In the connected home, you can control audio and video systems, lighting, security cameras and door locks from a single remote, a smartphone or a tablet. And you can do it from anywhere in the world as long as you have an Internet connection.
For many, Google’s recent jump into the connected home market is a sign that the trend is very real, very big and likely to pay off for early investors. Industry analysts suggest the connected home represents a $10 billion market this year. And that it will grow four-fold over the next three years.
But for many inside the building trades, this was old news. The connected home has been in the works for over a decade – what’s different now is that devices and cloud-based software are making the connected home sexy and user-friendly.
Philips’ (NYSE:PHG) Hue light bulbs – which you can control via a smartphone – are one recent example of what’s selling. Bose stereos are another. But without a doubt, Nest’s smart thermostats and smoke alarms have created the biggest buzz in recent months.
If you didn’t hear about this deal, or just aren’t familiar with Nest, the company’s devices can be accessed and controlled via any Internet-enabled device, and they come with cloud-based software that allows the homeowner to track the property’s heating and cooling cycles.
Nest’s products represent one small part of the connected home. At the moment, the product lineup is fairly limited – just smoke alarms and thermostats.
There are other ways to play the bigger trend – companies that are connecting almost everything in your house that has a chip in it.
And that’s likely to be the bigger opportunity for companies, as well as investors who have exposure to the connected home.
Nest’s products and its marketing are directed at homeowners. The average consumer can buy a thermostat or smoke detector, connect a few wires, and be done with the project. That’s a great marketing strategy for these types of products.
But it’s also limiting.
More robust products function like an operating system for the entire home, controlling everything from heating and cooling to lighting, sound systems and security systems. Even appliances and ventilation can be controlled.
There are just a few public companies in the world that can connect these single devices and provide a much broader level of home connectivity.
Investors should look to large companies, including Philips and Honeywell (NYSE:HON), to get broad exposure to the connected home opportunities. But also keep an eye out for smaller companies, many of which aren’t public yet, to come into the limelight as the connected home gains popularity over the coming years.
In my 100% Letter advisory service, I’ve added one of the few pure-play small cap stocks to play the connected home. You can find out more about this service, and stock, by clicking here.