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3 Stocks to Invest in the Internet of Things

By Keith Noonan, Daniel B. Kline, and Brian Feroldi – Updated Sep 21, 2018 at 1:24PM

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IBM, Skyworks Solutions, and Cisco Systems made this list of Internet of Things stocks that could help investors capitalize on the growth of device connectivity.

If the Internet of Things progresses as many are expecting, trillions of dollars in value will be up for grabs over the next decade, and the companies that take advantage of and facilitate the shift are positioned for huge benefits. A survey from research company Gartner found that the number of organizations using IoT data will increase by roughly 50% in 2016, and that 43% of the organizations in its survey had already used or planned to use IoT connections and data this year. With far-reaching potential and applications across industries, most companies will soon have some connection to the Internet of Things.

To get an idea of which stocks could be lifted by the rising tech trend based on machine-to-machine connectivity we asked three fool.com contributors to spotlight a company that might help investors ride the IoT wave.

Image source: Getty Images.

Daniel B. KlineWhen you think of IoT, IBM (IBM -0.26%) may not be the first brand to come to mind, but the company has been quietly making big waves in the space for quite a while. Through its Watson platform, IBM has been working with partners to make smarter connected products.

That may not be the broad play some companies are making in the space, but it's one that can be heavily monetized. IBM licenses its technology, and Watson has built up a powerful brand name. It's a platform that can use data collected by IoT devices to help partners make better decisions. IBM explained it as follows on the Watson IoT website:

Gain insight from huge volumes of IoT data to make better decisions and optimize operations. Apply real-time analytics to monitor current conditions and respond accordingly. Leverage cognitive analytics with both structured and unstructured data to understand situations, reason through options and learn as conditions change.

To put that into more simple terms, Watson could help connected products be even more intuitive. Instead of a high-end medical device, say an MRI machine, merely using the IoT to order its own repairs when needed, Watson can help figure out exactly what it needs in advance.

IBM is not taking the front door into the IoT, but it's positioning itself to offer a solution that can work across multiple platforms and ecosystems. It's a smart play by the company that has already paid off with a number of partnerships that should only grow going forward.

Brian Feroldi: If predictions about the IoT come to fruition, then demand for specialized semiconductor chips is likely to grow significantly from here. That plays right into the hands of Skyworks Solutions (SWKS -2.19%), which could be a nice way to play the trend.

Skyworks Solutions' stock has been on fire over the last few years, propelled mainly by the explosive growth of the smartphone industry. Skyworks supplies chips to nearly every major smartphone provider in the world, so demand for the company's products has grown right along with the market. Over the last five years, the company's top line has grown at an impressive 20% annualized, and earnings have grown even faster.

But Skyworks' management isn't resting on its laurels; it's been investing aggressively to become a leader in the IoT space. Every quarter, the company announces design wins in new growth markets like drones, smart TVs, and cameras, putting the company at the forefront of the trend.

One reason I'm confident Skyworks is a great way to play the IoT trend is because the company has a history of growing sales without needing to discount its products. Believe it or not, last quarter, Skyworks was actually able to expand its non-GAAP gross margin by 410 basis points, coming in at 50.8%. That achievement should be applauded, especially when you consider that chip suppliers face huge pressure from customers to lower prices in order to maintain their market share.

More recently, the markets haven't been very enthusiastic about Skyworks' prospects, and they've taken down the company's share price accordingly. The smartphone market is maturing, so growth is expected to slow considerably for smartphone suppliers. Currently, shares of Skyworks can be purchased for less than 13 times trailing earnings.

I think the market is far too focused on the near term and is ignoring Skyworks' long-term growth potential in the IoT space. If you're looking for a cheap way to play the IoT trend, you might want to give Skyworks' stock a closer look.

Keith Noonan: Cisco Systems(CSCO -0.35%) position in network hardware and its push into Internet of Things services technologies look to make it one of the driving forces behind increased device connectivity and data management. This, combined with the stock's reasonable valuation and strong dividend, make it a top choice for investing in the IoT.

February saw Cisco purchase Jasper Technologies for $1.4 billion and integrate the business into its IoT Cloud Business Unit. With the purchase, Cisco rapidly accelerated its push into IoT platform services by adding over 3,500 enterprise service customers and positioning itself as one of the leading enterprise IoT providers.

Cisco is also tailoring its routing hardware for IoT applications and delivering IoT-specific routers for businesses; the company is teaming with Intel, Ericsson, and Verizon for the development of 5G routers. With a big increase in the number of connected devices and data generated, faster networks capable of handling greater information loads are needed, and 5G networks are expected to be a key part of IoT proliferation. 

Cisco's dividend yield sits at a chunky 3.5%, and free-cash-flow generation of roughly $12.7 billion over the last 12 months indicates that the company will have plenty of money coming in to fund future payouts and new IoT research and acquisitions. Trading at roughly 14 times forward earnings projections, the company's stock is affordably priced and offers strong growth prospects tied to the rollout of IoT technologies. 

Brian Feroldi has the following options: long January 2017 $195 calls on IBM, short January 2017 $195 puts on IBM, short January 2017 $190 puts on IBM, long January 2018 $175 calls on IBM, and short January 2018 $175 puts on IBM. Daniel Kline has no position in any stocks mentioned. Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gartner, Skyworks Solutions, and Verizon Communications. The Motley Fool recommends Cisco Systems and Intel.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

IBM Stock Quote
IBM
IBM
$148.37 (-0.26%) $0.38
Cisco Systems Stock Quote
Cisco Systems
CSCO
$48.40 (-0.35%) $0.17
Skyworks Solutions Stock Quote
Skyworks Solutions
SWKS
$92.91 (-2.19%) $-2.08
Verizon Communications Stock Quote
Verizon Communications
VZ
$39.02 (0.26%) $0.10
Intel Stock Quote
Intel
INTC
$29.34 (-1.11%) $0.33
Telefonaktiebolaget LM Ericsson Stock Quote
Telefonaktiebolaget LM Ericsson
ERIC
$6.32 (2.76%) $0.17
Gartner Stock Quote
Gartner
IT
$342.57 (-0.20%) $0.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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