Best Companies To Invest In For ‘The Internet Of Things’
The Internet of Things. A somewhat nebulous and colorless title for a concept that could revolutionize the world in much the same way the internet originally did. The idea is that everyday objects will be interconnected and able to identify themselves to other devices.
The best way of explaining IoT is with examples. Picture a power generator that’s able to let maintenance know when there’s a problem without first being inspected, or remote monitoring systems that enable home automation – imagine your appliances being connected via wi-fi enabling it to download updates and ensure smooth operations. Recent additions to the IoT include automated car sensors that activate brakes when objects enter a field of range and bio-chip implants in farm animals to make them easy to track and catalog.
The Internet of Things is in its infancy and yet we can already see the impact it’s having on the world. Mobile payments allow consumers to pay for basic services like fast food by simply tapping their phone, building on technologies like RFID, near-field communications, QR codes, and digital watermarking. Applications in environmental monitoring, infrastructure management, and medical and healthcare systems are revolutionizing the way we go about our day-to-day lives, and the long term benefits could be exponential.
ABI Research indicates that there are over 10 billion devices connected in the world wirelessly with more than 30 billion expected by 2020. Gartner, Inc. says that the IoT will grow to 26 billion units installed by the same year resulting in a global economic value addition of $1.9 trillion. This expectation far outstrips the expected growth of other items like smartphones, tablets, and laptops which should hit 7.3 billion units by 2020.
The anticipated widespread proliferation of IoT-equipped products partly stems from the extremely low cost required to add the functionality. Connecting products to abilities like remote control and monitoring will increase efficiencies and lead to higher productivity for every industry. By 2020, even objects that cost less than $1 will have some sort of IoT technology equipped.
The Companies That Will Lead The Way
Financial giant Goldman Sachs (GS) has leaped into the unknown waters IoT headfirst and is expecting to profit from the explosive growth anticipated by the revolution. Because the IoT is such a large concept, Goldman Sachs has broken it down into 5 main categories that the technology will fit in to:
- Industrial Applications
- Home Applications
- Car Applications
- Municipal Applications
- Wearable Devices
The new trend has just begun and could last for the next decade (or even longer). Just last year, IoT start-ups attracted more than $1 billion in venture capital and deals like Google’s $3.2 billion acquisition of Nest Labs, a home-monitoring and energy management internet company, means that investors are gearing up for big growth. Given their exposure to the Internet of Things, the following companies are best positioned to take advantage whether it’s through chip manufacturing or network engineering:
The $133 billion networking and communication devices conglomerate is the current leader in IoT advancements. The company hosts the Internet of Things World Forum, first held last year and scheduled to meet again in October of this year. Thought leaders from around the world in the public and private sector collaborate and discuss industry trends regarding IoT.
The first step in upgrading to IoT is to convert current networks to an IP-based system – the very brand of Cisco. Integrating operational technology and information technology is the reason behind one of the company’s latest creations, Cisco Industrial Smart Solution. Focusing on business and industrial systems, the new program converts networks to IP-based solutions that will increase operational efficiencies and boost security. CISS partners with other IoT leading companies like Rockwell Automation to build the enhanced architecture.
According to the company’s website, 99% of things are not currently connected to the internet and $14.4 trillion worth of value will be built using IoT during the next decade. It’s clear that Cisco is positioning itself to be the leader in IoT well into the future.
Cisco has performed well so far this year, up over 11%. The company’s relatively low debt burden allows it to continue making large investments in IoT which should translate to its bottom line. The company is allocating $150 million into IoT startups. By 2020, startups are expected to generate 50% of all IoT revenue. Interested investors may also be attracted to the roughly 3% dividend CSCO yields annually.
As one of the companies that has changed the world we live in down to it’s fundamental core, it’s no surprise to see Google on our list. The company’s claim to IoT will primarily be driven by its Android software. From smartphones to refrigerators to farming equipment, Android’s open source software lies at the heart of it all.
Apple’s iOS is limited to Apple products which could be the reason that globally, Android outsold the iPhone 4:1 in 2013. The Android revolution controls the lion’s market share, now at 80%, while iOS technology is falling behind along with Microsoft’s brand. Apple owns 16% of the market while Microsoft is struggling to hold to 3%.
Google is making acquisitions in preparation for IoT with the $3.2 billion purchase of Nest Labs, it’s $555 million buyout of Dropcam, and $500 million for Boston Dynamics, a robotics company. Considering the internet giant’s extremely low debt-to-equity ratio, it has plenty of free cash on hand to make more acquisitions as needed. Long term EPS growth is expected to be 16.5% making Google an incredible force to hold on to.
Rockwell Automation (ROK)
Concentrating on factories and industrial environments make Rockwell Automation a clear winner when it comes to near-future application of IoT technology. Smart machines with sophisticated analytics will allow greater manufacturing possibilities and new ways of doing things. Industrial uses with IoT is estimated to be valued at $4 trillion over the next decade giving the company unprecedented growth opportunities.
Rockwell has already entered the IoT space with internet-linked systems that bring entire plants online. Sensors track operations and increase productivity all while reducing overhead and other costs. Suppliers are alerted when new parts are needed and customers are able to deliver products more quickly. Failures can be predicted before they occur so maintenance costs are kept to a minimum and expensive downtime is reduced.
A strategic partnership with Cisco gives Rockwell the ability to give customers a seamless transition to IoT systems. Together they integrate systems using EtherNet/IP, the world’s largest open industrial Ethernet network. Theoretical advances like holographic data maps and smart grids that eliminate things like flight delays and power outages are being talked about not as a thing of science fiction, but as the next real industrial revolution.
From a fundamental perspective, Rockwell looks strong trading at 17 times future earnings and future EPS growth expectations of over 11%. Like Cisco, it offers a dividend, currently yielding 2%. The stock appears greatly oversold based on its RSI of 20 stemming from lower-then-expected earnings in its latest report but could be a value pick-up for long term investors.
Freescale Semiconductor (FSL)
It shouldn’t come as any surprise that a semiconductor company would make the list of up-and-coming IoT companies and Freescale stands out as a leader in the field. It manufactures microprocessors and micro-controllers for the automotive, consumer, industrial, and networking industries. Other items like sensors and integrated circuits are the foundation of IoT and Freescale is a major supplier to the revolution.
From smart automotive systems like adaptive braking and traffic monitoring to cloud computing and data centers, Freescale lies at the heart of it all. The company provides customers with real-world solutions like software, operating systems, and protocol stacks to assist in streamlining development and overcoming hurdles. Command structures provide customers with secure connections and up-to-date architecture all while ensuring that power requirements to run the operations are kept to an absolute minimum. As cloud-computing begins to increase in design and complexity, Freescale develops solutions that offer predictive capabilities creating adaptive technologies.
Freescale looks cheap trading at just 10 times future earnings and has performed exceptionally well YTD, climbing over 22%. Long term EPS growth is estimated to be 15% and quarterly earnings growth year-over-year is 212%. This growth stock could be one of the biggest gainers when IoT becomes more mainstream.
Other Players In The Internet Of Things
While far from being comprehensive, other companies are uniquely situated to take advantage of IoT as well. Here’s a quick rundown of them and how they are positioned for IoT:
- Zebra Technologies (ZBRA) – A leader in barcode and RFID technology, Zebra also has a portfolio of sensors and location equipment used in multiple industries.
- Qualcomm (QCOM) – Specializing in mobile networks and connectivity, Qualcomm builds the framework that allows IoT to truly become global.
- InvenSense (INVN) – Another semiconductor company, InvenSense is a wearable device company that will allow users to connect to IoT with glasses, watches, and other items.
The Future Is Waiting, But What Will It Hold?
The Internet of Things promises increased efficiency and quicker delivery across all industries. Within the next decade, business equipment could be automated with smart machines that download updates to stay current and let other devices know when a product is completed to limit delays. Agriculture could see a boom with technologies that let farmers know when to plant and harvest with machines and sensors that monitor the growth and environment of crops and animals.
Nearly every aspect of our lives could benefit from IoT, but critics are quick to point out that caution should be used. Privacy issues are the main concern with everything digital and connected around the world. Once the world is united online, property rights and boundaries could become blurred. Codes are what will make things work and who’s to say that coders aren’t the ones who truly own assets?
The dangers that could arise from hackers altering codes could have disastrous results. Once we become dependent upon the machines to operate from beginning stage to end stage, an alteration in coding could compromise the integrity of millions of identities.
Certainly, if we are to move forward with IoT, these security concerns must be addressed and resolved to everyone’s mutual satisfaction. The possibilities are endless, but the dangers are real.
CEO, Elite Wealth Management
Full Disclosures: http://elitewm.com/disclosures/
This article is not intended as investment advice. Elite Wealth Management or its subsidiaries may hold long or short positions on the companies mentioned through stocks, options or other securities.