This article was originally published on Nov. 9, 2016, and updated on April 6, 2017.
The Internet of Things (IoT) market, which connects various objects to each other and the cloud, is often cited as the "next big thing" for the tech sector. The number of connected devices worldwide is estimated to soar from 15 billion in 2015 to 200 billion by 2020.
However, the market is massive and investors might not know where to start. I believe that as a primer, investors should take a closer look at three top stocks in the IoT market -- Sierra Wireless (SWIR), Cypress Semiconductor (CY), and Qualcomm (QCOM -1.75%).
Image source: Getty Images.
Sierra Wireless
Sierra Wireless is frequently mentioned as a "pure play" on the IoT market. That's because it's the world's leading manufacturer of 2G, 3G, and 4G embedded modules and gateways, which link objects to the cloud and each other.
Sierra previously faced tough competition from cheaper Chinese rivals, but it wisely bulked up by acquiring smaller wireless connectivity companies like Maingate, Mobiquithings, GenX Mobile, and the embedded module assets of GlobalTop. By scaling up, Sierra's gross margins expanded, although it continues to deal with slower enterprise spending and macro headwinds in certain markets.
But looking ahead, analysts expect Sierra's revenue to rise 7% this year and 9% next year on growing demand for IoT modules. Its non-GAAP earnings are expected to rise 22% this year, and grow another 24% next year on stronger sales and improving margins. Sierra already rallied 85% over the past 12 months and its P/E ratio of 55 looks lofty, but its forward P/E of 26 indicates that the stock could continue rising over the next few quarters.
Cypress Semiconductor
Cypress sells programmable chips, memory, and other solutions for automotive, industrial, and networking purposes. It boosted its presence in specialized memory chips in 2015 by merging with Spansion in a $5 billion deal. It then became a major player in the IoT market by buying Broadcom's (AVGO -1.84%) IoT business for $550 million last year.
That purchase added Broadcom's Wi-Fi, Bluetooth, and Zigbee IoT product lines, its WICED brand and developer community, and all related intellectual property to Cypress' portfolio. Prior to that purchase, Cypress' main presence in the IoT market consisted of ultra-low power programmable SoCs, which were paired with generic radios. However, Cypress CEO T.J. Rodgers declared that pairing those SoCs with Broadcom's IoT devices could turn the company "into a force in IoT" by creating an "easy-to-use programmable embedded system solution" for its 30,000 customers (at the time) worldwide.
Analysts expect Cypress' revenue to rise 11% this year and 5% next year. Its non-GAAP earnings, buoyed by job cuts and other cost-cutting measures announced last year, are expected to rise 37% this year and 42% next year.
Last August, reports indicated that TPG Capital was interested in acquiring Cypress at $15 per share, and the chipmaker is frequently cited as a possible takeover candidate in the ongoing consolidation of the semiconductor market. Recent rumors also indicate that it could provide the USB type C connector for the iPhone 8. The stock has rallied more than 50% over the past 12 months, but its forward P/E of 14 indicates that the stock could still have room to run.
Qualcomm
Qualcomm, the biggest mobile chipmaker in the world, will become the top automotive chipmaker in the world if its acquisition of NXP Semiconductors (NXPI -3.34%) clears regulatory hurdles. That acquisition will complement its acquisition of IoT and automotive chipmakers CSR last year, as well as its new Snapdragon chips for drones, wearables, connected vehicles, and other IoT devices.
Analysts expect Qualcomm's revenue and earnings to respectively rise 1% and 5% this year, but those estimates exclude the impact of the NXP deal.
Image source: Qualcomm.
Most of Qualcomm's revenue still comes from its mobile SoCs (system on chips). But that could soon change as the chipmaker aggressively expands into adjacent markets across the IoT. The development of new IoT technologies will also strengthen its licensing business, which generates most of the company's profits by charging licensing fees for 3G/4G devices. This business has notably come under fire from regulators and major customers in recent years over antitrust allegations.
Qualcomm doesn't regularly disclose how much revenue comes from its IoT business, but that figure topped $1 billion in 2014. With the subsequent acquisitions, investments, and development of new chips, that figure should be considerably higher today. It also leads the AllSeen Alliance, a consortium of companies which use its open source AllJoyn framework to enable IoT devices to communicate with each other.
The bottom line
Sierra, Cypress, and Qualcomm all represent different ways to invest in the IoT market. Sierra will give you the most direct exposure, but it's arguably the riskiest. Cypress gives you more moderate exposure with its well-diversified portfolio of chips, while Qualcomm's core chipmaking and licensing businesses arguably make it the most conservative play.
