The Internet of Things (IoT) -- which links gadgets, wearables, smart home appliances, vehicles, and other objects to the cloud -- is a major growth market for tech companies today. Hardware makers are trying to sell new components for IoT devices, while software makers are building ecosystems that connect those devices on single platforms to collect data.
In previous articles, I've noted that companies like Skyworks Solutions, Sierra Wireless, Cisco, and Qualcomm were all straightforward ways to invest in the IoT market. But today, let's examine three lesser-known stocks that could also thrive in a world of more connected objects.
Arista Networks (ANET 3.67%) specializes in cloud networking platforms, which use more SDN (software-defined networking) solutions than hardware-based ones. By letting cloud platforms do the heavy lifting, SDN solutions reduce the amount of on-premise hardware -- like routers and switches -- required to set up a network. That reduces operating costs for businesses and makes it easier for them to scale up their operations.
Arista's data center switches and routers, which are optimized for SDN platforms, have been gradually chipping away at Cisco's market share. Looking ahead, Arista believes that combining its Jericho switches and FlexRoute software can replace dedicated internet routers with a cheaper SDN solution -- which could deal a devastating blow to traditional router makers like Cisco and Juniper Networks.
Rising demand for Arista's hardware and software propelled the company to double-digit annual sales growth for seven straight quarters. Analysts expect Arista's revenue to rise 31% this year, and its earnings are expected to improve 20%. Arista's P/E of 42 seems high relative to its earnings growth rate and the industry average of 13, but investors seem willing to pay a premium for the disruptive potential of its technologies.
Globant (GLOB -0.40%) creates "digital journeys," which bundle together various apps, sensors, and appliances that are customized for a company's specific needs. For example, an airline can ask Globant to create a "mesh" of sensors, software, and hardware that lets a traveler know if her luggage went on the wrong plane. The passenger could then be notified of the error and the time it will take to arrive, and her luggage will automatically be sent to the hotel -- without a call to customer service.
Globant's portfolio includes solutions for gaming, wearables, IoT devices, digital content, big data, and analytics. These services would be valuable for companies looking to connect everyday devices like shoes or fitness trackers to a larger ecosystem of products and services. Globant's customer list already includes major companies like Puma, Southwest Airlines, Electronic Arts, Coca-Cola, and American Express.
Globant has posted double-digit annual sales growth every quarter since its IPO in July 2014. Analysts expect that growth to continue, with 19% sales growth and 21% earnings growth this year. Globant isn't cheap at 50 times earnings, high compared to its growth rate and the industry average of 21. However, the stock's 25% rally over the past year indicates that investors are willing to pay a premium for its unique IoT design services.
Iridium Communications (IRDM 2.62%) is a provider of low-Earth orbit (LEO) satellites. It provides communication services to a wide range of customers across the mobile, maritime, aviation, government, and machine-to-machine industries. The LEO industry is an aging, low-growth one -- Iridum has only posted positive single-digit sales growth for the past three quarters.
Analysts expect its revenue to rise just 5% this year, and for its earnings to fall 11% due to the costs of launching new satellites to replace older ones. There are also concerns that SpaceX, which ferries Iridium's satellites into orbit, won't resume its launches in a timely manner after its launchpad explosion in September.
Nonetheless, Iridium remains a key company to watch in the IoT market, because it recently signed partnerships with several IoT platform providers to use its LEOs to provide satellite connectivity for IoT devices. Iridium's trailing P/E is skewed by several quarters of losses, but it trades at a fairly reasonable 15 times forward earnings.
The key takeaway
Arista, Globant, and Iridium all represent very different ways of investing in the Internet of Things. Arista and Globant are expanding into the market with disruptive new strategies, while Iridium is pivoting older satellite technologies toward the IoT. These moves are risky, but they could pay off in the long run as the number of connected devices surges over the next decade.