The Hundred-Billion-Dollar Wearables Market

Now we don’t rush in our or out of any of our stocks. If you were in pain at the lows when the market was down 3% yesterday and the Nasdaq was in full 10% correction territory, you might want to consider trimming down a little bit on this reprieve. Otherwise, I think scaling into and/or holding our long steady for now is still the overall playbook strategy for now.

Here’s today’s report:

Now, while the markets are down nearly double digits in a straight line with high-beta tech stocks having led the way down, is the time to start scaling into some of the best Wearables Revolution stocks.

When I say “Revolution,” I mean it. Recall all the articles I wrote and TV spots I did about the App Revolution, explaining how huge it would become. Well, the Wearables Revolution is going to be the next huge phase of the App Revolution and it’s going to be even bigger than the smartphone market when the calendar clicks over into the 2020s.

You see, most people will have three or four or even double digit wearables for every smartphone they carry. Looking out five years, I expect that the phablet/large-screen smartphone trend has peaked and that smartphones are about to go credit-card-sized.

With the advent of ever more functional wearables like the Apple Watch and Google Glass, people will use be less frequently looking at and engaging directly with their smartphone. They’ll be connected and streaming content both up and down into and from the Internet using apps on wearables. The smartphone will increasingly become a hub rather than something you engage with directly.

If the smartphone market is well over a billion units per year, and if people are going to have multiple wearables for every smartphone they have, we’re looking at a multi-billion unit industry. Let’s give the average wearable a $99 price tag, and we’re talking about a market for wearables that will climb into hundreds of billions of dollars a year in the next decade. Revolution, indeed.

I recently wrote an eBook called, “25 Stocks for the Wearables Revolution,” and here are two of the picks from the report. For this weekend only, I’m offering the $49 eBook for free to all MarketWatch readers. Click here to learn more. Here are two of the stocks featured in the book.

GOOG – There’s a lot to be said for betting on wildly successful companies that are still run by their wildcat founders. Google’s long-term technological investments and willingness to gamble with wide ranging business plans and acquisitions is part of why they’ve maintained their dominance as the world have moved beyond their old core businesses of search and Internet ads. If they can maintain 20% plus topline growth with the wide margins of their businesses, there’s still a lot of upside to the stock as earnings growth and eventually, (yes) dividends for shareholders.

Google Glasses are part of that vision, but more importantly for Google is its Android and Chrome platforms. Darn near every app,wearable and drone will be compatible if not outright built upon Google’s Android operating system.

I consider the Google Unmanned Car technology to be a Drone Revolution business. It will likely end the low-end cabbie and limo and delivery businesses entirely and make city street grids incredibly more efficient as it reduces gridlock and butterfly effects on the streets. Probably will be at least 10 years before it’ll be mainstream in downtown NYC and downtown Rome, etc.

The stock’s not cheap, but rarely has it been since I first bought it the day it came public at $40. When it does get overloved, it can get hit hard near-term, as it can when the markets tank too. Long-term though, this remains a must-own for Revolution Investors. Revolution Investing Rating: 9/10

AMBA – Ambarella makes chipsets and software that record and transmit/uploadHD video. The company’s system-on-a-chip designs integrated HD video, image, and audio processing onto a single chip for delivering video and image quality, differentiated functionality, features, etc. AMBA is trading at 4x sales and at at 25x forward P/E. With topline growth of 20%-30% a year for the last few and for the next few years.

Investors are paying up a bit for this name as video capture and sharing is likely to become a bigger part of just about every connected device we use and own. The company does have nearly $7 a share in net cash, which gives management some financial flexibility. To be clear though, it’s a long way down to “cheap” if the company doesn’t deliver more topline growth in coming years. AMBA’s chips (which GoPro GPRO cameras use) are less of a commodity than GoPro’s cameras and the other devices you’ll find Ambarella’s chips in. Picture Ambarella as the Intel of HD video recording. Revolution Investing Rating: 8/10

I recently scaled back into some more GOOG and AMBA that I’d trimmed near their highs. I plan to own core positions both for many years to come (I’ve owned GOOG since the IPO, by the way) as the Wearables Revolution builds.