2018 outlook: information technology

3D-sensing smartphone applications—are a potential game-changer

  • Information Technology Sector
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  • Information Technology Sector
  • Investing in Stocks
  • Information Technology Sector
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As recently as 12 to 18 months ago, I was fairly negative on investment opportunities tied to the smartphone market because I thought it had become saturated. In retrospect, that was mainly because manufacturers had seemingly "hit a wall" with respect to new blockbuster features. With the introduction of 3D sensing in Apple’s iPhone X model—which began shipping in the fourth quarter of 2017—I believe that has changed.

The iPhone X is not the first smartphone to incorporate 3D sensing, a technology that can scan real-world objects, such as a person, object or room, and render those 3D images on a screen. However, what makes the iPhone X a game-changer, in my view, is the built-in hardware and software that supports 3D applications such as Face ID, Apple’s new facial-recognition technology. For example, the iPhone X contains Apple’s A11 Bionic chip, within which is a neural engine capable of processing 600 billion operations per second. This additional technology improves the accuracy of Face ID, making it a distinct improvement over Touch ID, the fingerprint-recognition system that Face ID is replacing.

Apple is a leader in 3D-sensing technology for now. However, I expect other companies to catch up in the next several years. More interesting, in my opinion, is what this 3D-sensing technology does and the opportunity that it presents. 3D applications have already surfaced on the gaming front, and I expect these to multiply as the technology advances. One example is the Nintendo/Niantic smartphone game Pokemon Go, which employs AR (augmented reality), the ability to incorporate graphics into real-world images.

On the home-improvement front, furniture maker IKEA recently unveiled an app that uses AR to allow users to scan a room and then place representations of IKEA furniture in the resulting 3D image. Eventually, I think 3D sensing could be incorporated into automobiles to enable autonomous driving. Even the popular pastime of taking "selfies" should get a boost, as smartphones' 3D capabilities will automatically correct for the "proximetry effect," the distortion that makes your nose look larger and your face look squeezed in these photos.

I see Apple as a driver of innovation, but I believe investments in certain component manufacturers may offer compelling growth opportunities going forward. These are the companies that make the camera lenses, sensors, speakers, illuminators, microphones and other products required for smartphone operation. These companies and their products also make features such as 3D sensing possible. I believe the best-positioned component makers represent attractive investment opportunities in the coming year, regardless of which company ultimately wins the smartphone race.

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Charlie Chai is a sector portfolio manager for Fidelity Investments. Mr. Chai, a CFA charterholder, joined Fidelity in 1997 as an equity research analyst, and he has managed multiple technology-related sector and industry portfolios since 2003.
Fidelity Thought Leadership Vice President Geri Sheehan, CFA, provided editorial direction for this article.
Views expressed are as of Dec. 1, 2016, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
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