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Investing in Internet of Things Stocks

Updated: Sept. 3, 2021, 11:09 a.m.
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Computers and smartphones aren’t the only devices connecting to the internet. Everyday objects such as light bulbs, TVs, major appliances, and even doorbells are increasingly being brought online. The Internet of Things (IoT) refers to the online networks of devices and objects, which communicate with other devices in the same network via connections to data centers.

While there is plenty of overlap among technology generally, cloud computing, and the IoT, pure-play IoT companies are relatively rare. Any company that makes consumer electronics devices, or sensors or chips for industrial or commercial purposes, has at least some exposure to IoT technology. Software platforms that manage IoT devices and cloud computing companies are also engaged with the IoT sector.

What is the Internet of Things?

Internet of Things refers to the online network of devices and objects that communicate with each other.

Source: The Motley Fool

Top IoT stocks

Top I stocksks, these four companies range from a diversified tech giant to a pure-play IoT company:

IoT Stock Market Capitalization Description
Cisco Systems (NASDAQ:CSCO) $235 billion The leading provider of enterprise networking hardware
Alarm.com (NASDAQ:ALRM) $4.5 billion Cloud-based platform for managing connected home and business devices
Dexcom (NASDAQ:DXCM) $50 billion A maker of glucose monitoring medical devices
Impinj (NASDAQ:PI) $1.2 billion A maker of radio-frequency identification (RFID) products

Source: Company websites. Data current as of Aug. 9, 2021.

1. Cisco Systems

Cisco Systems is the leading provider of enterprise networking hardware. Because its products form the backbone of the internet, the tech giant benefits from the explosion of internet-enabled devices.

Cisco sells networking hardware designed for handling large numbers of connected devices, including rugged, durable products aimed at industrial applications. On the software side, Cisco provides the Cisco Kinetic platform and other tools for managing IoT data and devices.

Cisco is also one of the largest cybersecurity companies. The company offers hardware, software, and services aimed at securing networks against threats, including those specifically targeting IoT systems.

Cisco is a low-risk means of investing in IoT. The company is supremely profitable, having generated adjusted net income of $13.7 billion on revenue of $59.3 billion in fiscal 2020. Cisco is sensitive to global economic conditions, given that its customer base includes many large companies, organizations, and governments, but investing in the stock is a good way to gain exposure to IoT without taking big risks.

This sensitivity to economic conditions played out during the pandemic, with the company experiencing a pause in demand from some customers as they grappled with economic uncertainty. However, Cisco has now returned to growth, and it should benefit from some pent-up demand.

The pandemic put pressure on Cisco’s sales, but the long-term story hasn’t changed. Cisco remains as dominant as ever, and the company is poised to benefit from the growth of the IoT market.

2. Alarm.com

While Cisco’s market cap exceeds tens of billions of dollars, cloud software provider Alarm.com is valued at just a few billion. Its relatively small size makes it riskier than the tech giant, but the company has plenty of growth potential.

Alarm.com provides a cloud-based software platform for managing a connected home or business. Subscribers use the software to manage internet-enabled devices, including security cameras, lights, locks, thermostats, and a range of other supported products.

Alarm.com partners with service providers to sell its platform to consumers and businesses. The company currently works with more than 10,000 service providers, has more than 7.6 million subscribers, and its platform connects more than 100 million devices. Revenue was up 23% in 2020 to $618 million, and the company was profitable.

Alarm.com expects the global smart security market to grow to $21 billion by 2022, expanding by 24% annually. With only a small fraction of homes currently using Alarm.com’s platform, the IoT company has a long growth runway.

The pandemic initially created some challenges for Alarm.com. Social distancing guidelines led many of Alarm.com’s service provider partners to have trouble selling and installing systems early in the pandemic, with installation rates dropping once stay-at-home orders were put in place. That situation has been resolved, and growth is back on track.

The pandemic hasn’t stopped the smart home trend. With millions of subscribers, Alarm.com is an early leader.

Did you know?

Total spending on consumer and industrial IoT technology is expected to pass $1 trillion by 2022.

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3. Dexcom

The Internet of Things goes far beyond consumer devices. Dexcom is focused on diabetes management, specifically medical devices for continuous glucose monitoring. The company’s G6 system includes an auto-applicator, a sensor and transmitter, and a touchscreen receiver displaying real-time glucose data. Compatible smartphones and smartwatches can also be used to display data.

The number of people in the U.S. with diagnosed diabetes grew from 1.58 million in 1958 to 23.35 million in 2015, according to data from the Centers for Disease Control. Today, more than 34 million Americans have diabetes, and 88 million American adults have prediabetes.

Dexcom estimates that market penetration for continuous glucose monitoring for people on intensive insulin therapy is 35% to 40% for type 1 diabetes and just 15% for type 2 diabetes.

The combination of growing rates of diabetes and the transition to continuous glucose monitoring will give Dexcom plenty of growth opportunities in the coming years. In 2020, Dexcom’s revenue grew 31% to $1.93 billion.

The pandemic didn’t derail Dexcom’s growth despite plenty of uncertainty early on. For 2021, the company expects revenue to grow by between 15% and 20%.

People with underlying medical conditions, including type 2 diabetes, are at higher risk of developing severe cases of COVID-19. This could prompt more people to turn to continuous glucose monitoring in the long run, even after the pandemic has passed.

Dexcom has historically traded at expensive multiples, but for those willing to take on some risk to gain exposure to both IoT and healthcare, it’s a stock to consider.

4. Impinj

Impinj specializes in solutions involving radio-frequency identification, or RFID. Impinj’s RFID tags are used by retailers, manufacturers, and logistics companies to track inventory and assets.

The market for RFID products, including tags, readers, software, and services, was worth $11.6 billion in 2019, according to IDTechEx, and it’s expected to grow to $13 billion by 2022. Apparel retail is so far one of the biggest markets by volume for RFID technology, with around eight billion RFID labels used in 2018 to tag apparel items.

Apparel retailers were hit hard by the pandemic, with many stores forced to close their doors during stay-at-home orders. Multiple apparel retailers have gone bankrupt, including J.C. Penney, Tailored Brands, J. Crew, and Neiman Marcus.

This is obviously a problem for Impinj, and it has hurt the company’s results. Impinj’s revenue tumbled in 2020, and sales were still down slightly in the first quarter of 2021. The retail industry is recovering, but a full recovery could take years.

Impinj still has some growth opportunities created by the shift to e-commerce. While many of the company’s end markets haven’t been looking great, bright spots include omnichannel retail, supply chain, and logistics.

Impinj estimates that just 0.1% of connectable items are connected today. In the long run, trillions of consumable objects, ranging from food packaging to tires, could be tracked using RFID technology. Each RFID endpoint costs only pennies, making the technology economical for a wide array of use cases.

Impinj is a small company, with just $139 million of revenue in 2020. It has shipped more than 30 billion RFID endpoints over its lifetime, and that number could rise substantially in the coming years. Impinj is far from a sure thing as an investment, but it’s a company to watch in the IoT space.

Is buying IoT stocks right for you?

If you'd rather not choose among individual stocks, you can still gain exposure to the IoT sector by investing in an IoT-focused exchange-traded fund (ETF). One such fund is the Global X Internet of Things ETF (NASDAQ:SNSR), which holds positions in dozens of IoT-related companies, including Dexcom. Buying shares in an IoT-focused fund confers instant sector diversification.

Whether you opt for an ETF or the stocks of specific companies, it's important to be aware of the risks of investing in IoT companies. The COVID-19 pandemic caused demand from some commercial customers to recede, and the ongoing global shortage of semiconductor chips, which is affecting companies in many industries, could persist for years.

But if you are a risk-tolerant and patient investor, then investing in IoT companies may be a smart choice for you. The research provider IDC estimates that total spending on consumer and industrial IoT technology and services will surpass $1 trillion by 2022, growing at a double-digit percentage rate. Everyday objects are increasingly connecting to the internet, and while a "smart toaster" will always be gimmicky, IoT technology is useful for many important applications. Home security, asset tracking, and management of chronic diseases are among the many use cases for IoT technology.

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