This article was updated on May 17, 2016
Imagine adjusting your house's temperature, lighting, and security settings while you're at work, or turning your oven on to cook a holiday meal, or even checking in on a video stream of your children and pets to make sure everything is sound on the home front. These features may sound like something out of an episode of The Jetsons, but The Internet of Things (IoT) revolution is already unlocking the potential of a fully connected world and making widespread inter-device connectivity a reality.
The Internet of Things is also set to be a big driver in the business world, and the big players in the IoT tech push are already gaining some serious ground this year.
To get an idea of which Internet of Things stocks could be big winners in 2016, we asked three Motley Fool contributors to spotlight their picks for the coming year's top IoT stock. Read on to learn which IoT companies could be big beneficiaries of bringing the digital world together in 2016.
Tim Brugger: According to Juniper Research, there are more than 13 billion IoT devices in use, and that figure will nearly triple by 2020. One big piece of the IoT pie will be smart homes, a market expected to grow to nearly $60 billion in four years. That's good news for Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and its Nest smart thermometer, smoke, and carbon monoxide detector.
There was some consternation when Google wrote a $3.2 billion check for Nest in early 2014. It turns out, Alphabet's acquisition of Nest was just the first step in securing its place as the leading smart-home provider. A $555 million deal for video monitoring manufacturer Dropcam was Alphabet's next foray into IoT, and that was quietly followed by its acquisition of Revolv.
The deal for Revolv may have flown under the radar, particularly compared to the nearly $4 billion spent on Nest and Dropcam, but it may have been Alphabet's biggest IoT move. Revolv helped Alphabet solve one of the smart-home market's biggest challenges: finding a way for all those connected devices to "talk" to each other. Nest is now the hub of Alphabet's smart-home product suite, and it's even initiated a mass marketing campaign to raise awareness.
Another reason Alphabet belongs on a short list of IoT stocks in 2016 is its proven ability to utilize data to enhance a user's experience, either online or in a smart home, and improve its marketing results. And as big as the IoT device market is expected to become, the real value lies in utilizing the data. As per Juniper Research, data will become "the backbone of its [IoT] long-term success," and Alphabet's ready and waiting to take full advantage.
Daniel B. Kline: As it controlled the personal computing world for so many years through its Windows operating system, Microsoft (NASDAQ:MSFT) wants to do the same with the IoT. The company designed its latest OS, Windows 10, to operate as a slimmed-down operating system for all manner of devices. The company has grand plans for its OS, which Windows boss Terry Myerson spoke about at the company's 2015 Build developers conference.
"Our goal is that within two to three years of Windows 10's release there will be 1 billion devices running Windows 10," he said. "No other platform version in any ecosystem is available on 1 billion devices. Current estimates for Google Play KitKat is at a little over 500 million devices. iOS 8 is lower than that."
Myerson was speaking to developers he was trying to convince to work on Microsoft's platforms, but there is no reason to believe the company won't hit its numbers. In fact, if Gartner's prediction that "6.4 billion connected things will be in use worldwide in 2016," there is reason to believe 1 billion may be a low prediction for Microsoft. Microsoft said in May 2016 that Windows 10 is on 300 million devices worldwide.
Windows still powers the vast majority of business computers running globally. It's the accepted operating system of enterprise, and it's simply logical that many existing Microsoft partners will extend that to IoT products. That should give Microsoft a whole new revenue stream and allow it to make Windows a growth product after years of seeing market share move to tablets and other devices running Android, iOS, and even Chrome.
Keith Noonan: Ambarella's (NASDAQ:AMBA) valuation has dipped more than 30% year to date and more than 50% over the last 12 months, turning the once high-flying stock into a value play. After climbing as high as $129 in June 2015, Ambarella now trades in the $37 range, and the sizable drops present a good jumping-in point for those who see promise in the company's Internet of Things technologies.
Competitive threats from Qualcomm and Nvidia amid disappointing sales targets have pressured Ambarella stock, but the company's chips for Internet-connected cameras are still best in class, and a range of new products in emerging categories, combined with the possibility that the market has been overly punishing the stock, creates the potential for a substantial turnaround in the remainder of 2016. Recent stock sell-offs are partially tied to ongoing under-performance from its biggest customer, GoPro -- which has seen its outlook collapse as its HERO 4 Session camera sold far below expectations and erased perceptions of brand momentum -- however, the fact that Ambarella has counted on GoPro for roughly 30% of its sales might not be as dooming as it looks.
In the action camera space, Ambarella also provides chips for GoPro competitors including Garmin and Xiaomi, and the company is positioned at the forefront of enterprise security, home monitoring, and drone cameras, while also having compelling positions in cameras and sensors for automobiles, light fixtures, and doorbells. Video is one of the biggest components of the IoT push, and Ambarella has the opportunity to benefit as visual sensors become increasingly commonplace.
Being featured in IoT cameras from big smart-home players like Alphabet and Comcast, as well as a range of products from Chinese manufacturers, should create a significant growth opportunity for Ambarella in 2016. The GoPro story might also see a major turnaround this year if the company delivers standout features and better marketing for its upcoming HERO 5 camera.
Looking at Ambarella's valuation, the company's market cap sits at roughly $1.2 billion with no debt on the books and an enterprise value of roughly $890 million. The stock's forward price-to-earnings ratio of roughly 13 sits well below the forward P/E of 26 for its industry segment and the 17.6 forward P/E for the S&P 500, and over-performance in one of its growing product segments or improvement at GoPro would likely send Ambarella soaring again.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Kline owns shares of Microsoft. Keith Noonan has no position in any stocks mentioned. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Ambarella. Try any of our Foolish newsletter services free for 30 days.