4 Top Smart-Home Stocks to Buy Now

The smart home, or connected home, industry has seen explosive growth over the last few years, as advances in the technology have made it much more intuitive and user-friendly. According to Zion Market Research, the global smart-home market exceeded $24 billion in 2016 and is forecast to soar to $53 billion by 2022.

An opportunity of that magnitude has attracted the attention of Wall Street and some of the best and brightest tech companies. Companies with smart-home offerings can be divided into three broad categories: do-it-yourself (DIY), managed services such as home security, and professional installation.

Smart-home products are seeing increasing adoption. Image source: Getty Images.

Let's take a look at some of the companies involved.

With all those companies to choose from, which offer investors the greatest opportunity? I've got four favorites, three in the do-it-yourself category that provide devices and software and one in the category of professional installation. But first, some background.

What is a "smart home"?

In very general terms, a smart home incorporates any number of internet-connected products to automate, monitor, or control home systems. The devices can be managed on a local system, or remotely via a smartphone, tablet, or computer, and could include lighting, security, climate control, appliances, and entertainment. People can use the devices to perform a variety of functions like remotely viewing real-time streams from a security camera, turning lights or appliances on or off, or adjusting a thermostat.

There was a time when these home automation systems required professional installation and were found only in high-end homes, but recent technological advances have resulted in options for every price range.

The rise of the digital assistant in smartphones was the first step in the changing landscape. The advent of voice-activated speakers based on artificial intelligence (AI) was the catalyst that put smart-home products within the reach of any consumer with broadband and a Wi-Fi network. Smartphones and smart speakers can be used as the control center for a smart home with the tap of a finger or a voice command, driving increasingly rapid consumer adoption.

Echo can perform smart-home functions using voice control. Image source: Amazon.

Smart speakers spur the revolution

Amazon started it all with the release of the Echo smart speaker in 2014, which has evolved into a family of devices. Alexa is the software that enables you to interact with the Echo hardware to perform a variety of functions -- and Amazon partnered with developers early on to boost her resume. The cloud-based assistant now has over 25,000 voice skills, with plenty of integration with smart-home devices. Users can turn on lights, control the TV, adjust the thermostat, or open the garage door, all by using the appropriate voice command.

In addition to the plethora of smart-home devices on its e-commerce site, Amazon recently introduced an in-home consultation service for the systems. Homeowners can schedule an appointment with an Amazon employee to evaluate their needs, perform a Wi-Fi assessment, and provide demos of products.

Amazon has a commanding lead in the space as, according to Consumer Intelligence Research Partners (CIRP), Echo has an installed base of 20 million units, controlling an estimated 73% of the U.S. market for home-automation devices. While this research only looked at smart speakers, it is useful in showing Amazon's impact on the segment.

It will be some time before Amazon's innovations in the smart-home market will produce any significant revenue, but did I mention that Amazon also has a well-known e-commerce business? Its online sales continue to grow exponentially, with revenue that increased 34% year over year to $43.7 billion in its 2017 third quarter. Other growth drivers include the company's Prime loyalty program and the Amazon Web Services (AWS) cloud computing business. Amazon's core operations provide the foundation for its work on AI-based products.

Google entered the home-automation market with the Home smart speaker. Image source: Google.

Built on a solid AI foundation

Alphabet may be known for its Google search engine, but the company has been a pioneer in AI research, the technology that makes smart speakers possible. The company answered Echo's challenge with the Google Home speaker that acts as its smart-home hub, and recently released several new additions to the lineup.

Data derived from the company's massive search engine provides the knowledge base for its devices. Rather than working via syntax-driven commands like Alexa, Google Home has more highly developed natural-language understanding, which increases its ability to comprehend and respond to a user's request.

Google supports more than 1,000 third-party devices that work with its smart speaker. The company also provides help-center support by chat or by phone for customers setting up their smart products using Google Home.

Rather than only working with other companies' smart-home products, Google has its own brand, Nest, which offers smart thermostats, smoke and carbon-dioxide detectors, and security cameras that integrate seamlessly with the device.

CIRP's analysis showed that Google Home controlled the remainder of the smart-speaker market, with an estimated 7 million devices and a 27% market share, which is impressive considering Amazon's two-year head start.

The Google search engine and ads will continue to be Alphabet's main revenue driver. In its recently completed third quarter, sales grew to $27.7 billion, a 24% year-over-year increase, while diluted earnings per share jumped an even more impressive 32%, to $9.57.

Apple's Home app connects to smart-home devices while providing end-to-end security. Image source: Apple.

If you're concerned about security...

Apple's flagship iPhone has a built-in app called Home that manages a ready-made HomeKit ecosystem of connected devices for the home.

What separates Apple from the competition is its penchant for privacy. Any product that works with HomeKit has been vetted by Apple to ensure end-to-end encryption, protected wireless chips, and various other measures designed to resist most hacking. The result is the most secure smart-home system available today. Apple lists dozens of HomeKit-compatible devices on its website, each meeting its rigorous standards for privacy and security.

Apple also uses a process called "differential privacy," which aggregates any data it collects and injects digital noise into the data in order to keep individual information private.

Apple is scheduled to release its HomePod smart speaker in early 2018, and if the past is any indicator, it will be the next "must have" device among the Apple faithful. With each new product category, Apple soon becomes the segment leader, as evidenced by the release of both the iPad and the Apple Watch.

Apple's HomeKit is inextricably tied to the iPhone, which produces the lion's share of the company's revenue. In its fiscal fourth quarter, the company reported revenue of $52.6 billion, up 12% year over year, and earnings per share of $2.07, an increase of 24% over the prior-year quarter. Apple's services revenue grew 34% year over year to an all-time record.

Control4 designs a home-automation system to meet your needs. Image source: Control4.

If you're not interested in DIY

Control4 is the only pure play on this list. The company removes the guesswork and potential missteps in setting up a smart home by designing and installing a system based on individual needs. Not only can consumers choose the devices and functions they want, but the company can also customize the interfaces used to control them, with everything from touchpads to touchscreens to voice control.

The company has a network of highly trained dealers who work with homeowners to realize their individual visions of a smart-home system.

Control4 realized that the network was the backbone of the smart home, so in 2016 it acquired Pakedge Device & Software for its integrated wired and wireless networks, allowing it to control that variable in the equation.

Control4 has seen explosive growth, and the stock has more than tripled so far this year. In its fiscal third quarter, revenue hit a record $65 million, up 17% year over year, and net income of $5.2 million nearly tripled from the prior-year quarter. A recent release of new audio products resulted in several analyst upgrades, and should contribute to future growth.

The fine print

It is important to note that with one exception, each of the companies mentioned produces the majority of its income from a previously existing and somewhat massive core business. Control4 is the outlier and the only pure play on the list.

While the smart-home businesses of the others could achieve considerable growth, they will continue to be dwarfed by each company's main revenue driver. These tech behemoths are vying for control of consumers' ecosystem of devices, with the smart home providing the open door.

Now that you've seen my picks for top smart-home stocks, it's time to pull out your smartphone, turn on the lights, and dig in to your own research.