Nowadays, almost anything can connect to the internet. From light bulbs and traffic lights to cars, TVs, refrigerators, sensor-pocked oil pipelines and the smart speaker in your home, it’s become difficult to walk 20 feet without bumping into the Internet of Things (IoT).
Size and scale makes investing in the Internet of Things complicated. Too many companies do something to make the IoT what it is, and yet buying every stock with an IoT story isn’t an option for most investors. What to do? The simplest and potentially safest route could be to invest in the biggest IoT stocks — large-cap companies with well-defined IoT business units that will grow as the movement grows…
The differences between the consumer IoT and the industrial IoT
Before we dig into the businesses behind the 10 biggest IoT stocks, it’s worth spending a couple of minutes to provide a bit more detail on the two different layers of the Internet of Things: the consumer IoT and the industrial IoT.
- The consumer IoT is composed of devices and infrastructure for augmenting the daily lives of everyday people. Smart home gear, fitness trackers, and embedded infotainment in your car, on a flight, or in a retail store are all examples of the consumer IoT at work.
- The industrial IoT is composed of sensors, robots, and other equipment that automate and improve the efficiency of industrial operations. Smart factories, responsive electric grids, and connected vehicle fleets are all examples of the industrial IoT at work.
Most IoT companies serve both consumers and industrial customers in some way. Amazon, for example, has the in-home Alexa smart speaker technology (consumer) and Greengrass software for helping process sensor data without a cloud connection (industrial).
It’s worth paying attention to the distinctions, because the opportunities are different. Consumer IoT is the fastest-growing segment, while industrial IoT is the biggest segment, researcher IDC reports. By 2022, combined spending on consumer and industrial IoT technology and services is expected to cross $1 trillion for the first time — and keep growing in the years to come.
Which stocks are profiting from the dramatic rise in IoT spending? Are they worth adding to your portfolio? Let’s tackle those questions for each of the 10 biggest IoT stocks by first examining their offering, and then reviewing their financials, competitive position, and the durability of their competitive edge. Here’s the 10 biggest, ordered by largest to smallest market cap:
|Name||What It Does|
|Intel (NASDAQ:INTC)||Semiconductor design and manufacturing|
|Cisco Systems (NASDAQ:CSCO)||Data networking equipment|
|Honeywell (NYSE:HON)||Diversified electronics manufacturing|
|International Business Machines (NYSE:IBM)||Business and hardware and software|
|QUALCOMM (NASDAQ:QCOM)||Wireless and cellular chip design|
|Analog Devices (NASDAQ:ADI)||Specialty chips for converting analog signals|
|Emerson Electric (NYSE:EMR)||Industrial technology and engineering|
|Johnson Controls (NYSE:JCI)||Technology infrastructure for buildings|
|NXP Semiconductors (NASDAQ:NXPI)||Chips for processing radio frequency signals|
|Rockwell Automation (NYSE:ROK)||Industrial automation technology|
How the Cloud and IoT work together
You may notice that three of the world’s largest companies — Microsoft (NASDAQ:MSFT), Amazon(NASDAQ:AMZN), and Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) — aren’t listed, yet all have substantial IoT operations. Why not include them? Put simply, IoT is a minor add-on for these companies – features of broad public cloud offerings that do much more than buttress the IoT operations of their customers.
That said, the Big Three have plenty to offer when it comes to IoT support. Take Microsoft, which offers a handful of tailored IoT products tied to its Azure public cloud platform. Most of Microsoft’s products are built to help customers grow their investment in IoT without adding physical infrastructure for supporting new devices. But it doesn’t end there. The company also bundles together sophisticated hardware and services to secure the equipment that shepherds IoT data across geographies. Amazon and Alphabet have similar solutions.
Amazon, for example, has tools for connecting and operating devices at the “edge” of the internet. Also referred to as an endpoint, the edge is where you’ll find internet-connected devices — from smart speakers such as Alexa to sensors on oil platforms. Amazon’s AWS IoT Greengrass is built to allow industrial devices to process data independently from the cloud, like the pressure sensor array connected to an oil drill pushing into the depths of the the Gulf of Mexico.
Alphabet’s Google Cloud is similarly broad in how it provides support for the Internet of Things. The company bills its Cloud IoT Core as a “fully managed service” for gathering, processing, analyzing, and ultimately visualizing data from a customer’s IoT deployment. Cloud IoT Core is also capable of orchestrating updates to every device on an IoT network.
At a high level, it’s best to think of the cloud as an enabling technology for IoT instead of part of the IoT. That’s why we didn’t include Alphabet, Amazon, and Microsoft on our list of the biggest IoT stocks to own.
As the world’s largest and most diversified chipmaker, Intel serves both the consumer IoT and the industrial IoT. Company marketing materials show seven areas where Intel offers IoT products and services, including:
- Computer vision, with software and customizable Intel chips for dramatically improving the volume of data processed by cameras in industrial and retail locations.
- Retail transformation, with high-performance Intel servers teaming with AI software to find and exploit patterns in shopping data.
- Smart cities, with Intel’s computer vision and AI tools working with partners such as Bosch and its Micro Climate Monitoring System to improve the way people move in cities and reduce emissions in the process.
Other IoT solutions from Intel provide more intelligent and immersive classroom experiences, automate factories, improve patient care, and put the smarts in smart, connected vehicles.
Financially, Intel is a slower-growth business with roots in the global PC business. To this day, it remains subject to the fits and starts of the global economic cycle. Revenue is up just 5.5% annually over the five years dating back to 2015, while cash flow from operations has improved 6.4% annually over the same period. Yet those figures belie how much revenue and free cash flow Intel generates on an annual basis — usually over $50 billion and $10 billion, respectively.
Competitively, Intel has the brand and resources to deliver IoT solutions at scale. According to its website, Intel has 15 wafer fabrication facilities around the globe, including four in the United States. These “fabs,” as they’re called, is where Intel manufactures thousands of IoT-ready chips from in-house designs.
While the Internet of Things is still a modest portion of Intel’s overall business, it’s growing quickly. Operating profit from the Internet of Things Group shot up 50.7% in 2018 on a 9% increase in segment revenue. That’s serious leverage Intel can continue to exploit in the years to come. In the meantime, a historically generous dividend yield — usually above 2% — makes buying to hold for the long term all the more rewarding.
Data networking is the glue that holds together a connected world. Cisco is the world’s largest data networking company, and a key player in enabling the industrial IoT. The company offers four specific products in this area:
- IoT networking, which includes a wide range of outdoor-ready, hardened gear for connecting every IoT device over long distances and in harsh climates.
- IoT data management enabled by Cisco’s Kinetic platform for intelligently routing and processing information where it’s most useful, including in the cloud.
- IoT management, which includes the DNA Center software and Prime Network automation tools for optimizing the performance of factory and other types of industrial networks.
- Built-in security, which includes a hardened device called the Industrial Security Appliance 3000 that includes over 25,000 rules for detecting and defeating known attacks against IoT infrastructure.
Cisco has plenty of time to let the strategy for these products play out in the market. You have to go back a decade for the last time the company generated less than $10 billion in cash from operations. In exactly none of those 10 years did Cisco ever spend more than $1.5 billion on capital expenditures. To this day, the company is flush billions of dollars in excess cash to acquire and deploy new technology to serve customers with IoT ambitions.
For years Cisco has faced upstart threats to its data networking business and has used its cash to acquire the most serious. The next 5-10 years shouldn’t be any different, especially with the company throwing off so much excess cash flow. Expect Cisco to keep making deals and expanding its lineup of IoT products and platforms…
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