Are you lost? These 5 companies bet on it
Fortune's Michael V. Copeland explains why companies that help you find your way -- and help marketers find you -- are hot.
(Fortune Magazine) -- When Nokia made its $8.1 billion offer for digital mapmaker Navteq in early October, the first question batted around by investors was, Why pay so much? The question they should have asked was, How do I get in? Not on Navteq -- too late for that -- but on the technology trend to which Nokia just gave a multibillion-dollar vote of confidence: location-based services.
"Location-based services" describes a range of applications that rely on knowing where you are -- from turn-by-turn navigation in a car to giving restaurant recommendations in particular neighborhoods. With increasingly powerful mobile gadgets connected to faster wireless networks, people and their digital lives are being pried loose from their desktops, dorm rooms, and houses.
As that happens, location becomes the foundation upon which to build all sorts of useful devices and services for consumers and businesses alike. "Location helps build the next phase of the web," said Anssi Vanjoki, head of Nokia's Multimedia Business Group, following the announcement of the Navteq bid.
When you know where people are, you can offer applications that will find their friends, their co-workers, or that very expensive piece of machinery they need to get their job done. You can deliver real-time traffic and weather information and city and restaurant guides -- and make money from it via advertising or fees.
What do you think Google's much-anticipated "Gphone" is all about? If Google knows where you are, the pinpoint ads it can serve up -- flogging the nearest 24-hour burrito joint, for example -- are that much more valuable.
Nokia (Charts) and Google aren't the only companies looking to profit from location-based services. Microsoft, Yahoo, practically all the wireless carriers, and all the large handset manufacturers are looking to exploit them as well.
Right now the numbers are small. Of the $118 million in revenue that downloadable mobile applications generated in the second quarter of 2007, according to Nielsen research service Telephia, 51% came from location-based services. But IDC projects that the U.S. market for location-based applications for consumers and business customers will grow to $3.2 billion by 2010.
The other part of the location business, those navigation gadgets that you take hiking or use in your car, is already much bigger. CIBC World Markets analyst Yair Reiner projects that sales of personal navigation devices (PNDs) will jump from about 25 million units worth $7.5 billion at wholesale this year, to 67 million worth $14 billion in 2010.
"Navigation is in less than 10% of the cars in the U.S. and Western Europe," Reiner says. "And GPS and navigation is in the single digits in terms of wireless devices. We are clearly at the very early stages of this market, and there is a lot of runway for growth."
One of the companies that stand to benefit the most in the growth of both automobile and wireless navigation devices is San Jose-based SiRF Technology Holdings (Charts) ($25), the largest producer of GPS chips in the world. SiRF is thought to have more than a 75% share of the GPS chips in the navigation market and is in a position to bolster its revenue even more as the chips find their way into an increasing number of handsets.
SiRF's share price has been dinged this year -- down almost 26% from its high of $34 in February -- because everyone and his sister is trying to get a piece of this business.
But the stock has been clawing its way back. Motorola (Charts, Fortune 500) -- a big SiRF customer -- and other handset makers are planning to launch GPS-enabled phones for the holidays to keep pace with Nokia. That has led analysts to boost their projections for chip sales. With a market cap of $1.3 billion, SiRF now trades at 20 times estimated 2008 earnings. Analysts see sales growth of about 30% for 2007, accelerating to 37% in 2008.
A new entrant in the GPS chip sector is Broadcom (Charts) ($42), which bought its way into the location industry through a $226 million acquisition of Global Locate during the summer. Broadcom, with a market cap of more than $22 billion, is a much more diversified company than SiRF, designing and making chips for everything from Bluetooth headsets to blue-laser DVD and digital TV.
The company, based in Irvine, Calif., has stated a goal of grabbing a 10% to 15% share of the cellphone market by the end of 2009, and it recently announced an integrated chip for 3G phones. Because of the number of markets it plays in, Broadcom offers investors more cover against the GPS market heading south, with some of the upside if it grows as much as expected.
Research firm Forward Concepts projects the compound annual growth rate for GPS chips used in cellphones at almost 40% through 2011. It's in cellular that Broadcom is likely to gain the most ground, says Forward Concepts principal analyst Will Strauss. "Broadcom made a smart buy," Strauss says, "and they are coming on strong." The street consensus is that Broadcom will see revenue growth of about 16% in 2008; it trades at 29 times 2008 earnings.
Location isn't just for consumers or BlackBerry-toting road warriors. Trimble Navigation (Charts) ($41) is another pure play location-services company but is focused on the engineering, construction, and farming industries worldwide. The outfit, based in Sunnyvale, Calif., sells GPS-guided autopilot systems that can steer a tractor along a path within two inches and automated laser-guided surveying equipment, among other products. About 65% of its revenue comes from construction and engineering markets, another 20% from agriculture.