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2 Top Internet-of-Things Stocks to Buy Now

diagram of a connected smartphone

The Internet of Things (IoT) is a $19 trillion opportunity, according to former Cisco Systems CEO John Chambers. That figure may be overstating it, but the IoT does present one of the most significant investment opportunities of our times.

One of the best ways to invest in broad-based movements such as the IoT is by buying shares in the companies that supply the hardware and infrastructure powering the trend -- such as Skyworks Solutions (NASDAQ: SWKS) and NXP Semiconductor (NASDAQ: NXPI) . Let's dig into each company to see what makes them two of the top IoT investments on the market today.

diagram of a connected smartphone

Image source: Getty Images.

Skyworks Solutions

Though it manufactures about 2,500 kinds of chips, Skyworks Solutions mostly touches on a single theme with its products: making complex connectivity tasks simple. For example, Skyworks' chips power a number of mission-critical tasks in Apple 's iPhones, such as solving connection interference problems, increasing data transfer speeds, and saving battery power. The company's unique ability to offer turnkey solutions for important tasks like this has made it a go-to supplier for mobile devices, a trend that will only grow with the continued rise of the IoT.

Skyworks' compelling value proposition continues to reveal itself in its quarterly results. In its most recent quarter, Skyworks increased sales 9% sequentially to $914 million, which also helped the company establish a new record for quarterly free cash flow and net income. The company's financial performance stands a strong chance of accelerating later this year, thanks to the anticipated debut of Apple's redesigned iPhone; the Mac maker accounts for 40% of Skyworks' sales via its contract manufacturing partner, Foxconn . Overall, the company should be able to maintain its above-average earnings growth for years to come. The analyst community estimates that Skyworks will grow its EPS at an average annual rate of 14.7% over the next five years.

Trading at 18 times its last 12 months' earnings. Skyworks Solutions looks like an appealing way to play the rise of the IoT.

NXP Semiconductor

Dutch IoT player NXP Semiconductor specializes in enabling secure connections between devices, which makes the company a candidate for strong growth as the number of devices that "talk" with one another increases in the years to come. The company enjoys market leadership positions across a host of connected-device applications, including automotive in-car networking and near-field communication, to name just a few. Its various leadership positions also provide NXP with a strong margin profile, as seen in its 48% GAAP gross margin last quarter. This situation allows NXP to reinvest in R&D, which spurs further innovation and extends its market leadership in a virtuous cycle that CEO Rick Clemmer and team have implemented to great effect.

However, for all of NXP's opportunity, investing in the company also comes with some important risks. Last October, for instance, it agreed to a buyout offer from chip giant Qualcomm (NASDAQ: QCOM) for $110 per share; its shares trade at $102 at the time of this writing. Qualcomm's offer was an all-cash deal, meaning that participating in NXP's continued growth will require investors buy Qualcomm stock outright after the buyout closes. But the outlook for Qualcomm's business -- aside from NXP -- has worsened in the months since news of the NXP buyout broke.

Qualcomm's patent licensing business, which produces the bulk of the company's profit, has come under pressure in recent years, as government regulators in China and the EU have accused the company of charging excessive royalty rates to mobile-device makers. This trend seems to have accelerated in recent months, as regulators in South Korea and the U.S. FTC have also sued Qualcomm over charges of anticompetitive business practices. Adding insult to injury, Qualcomm customer Apple sued the company in January over its patent licensing practices.

Qualcomm plans to defend itself to the hilt and has presented compelling counterarguments to some of the accusations. However, given the weight of its current legal entanglements, Qualcomm seems risky as an investment, even despite the long-term benefit the NXP Semiconductor buyout is likely to add.

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Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Qualcomm, and Skyworks Solutions. The Motley Fool has the following options: long January 2018 $90 calls on Apple, short January 2018 $95 calls on Apple, short August 2017 $87 calls on Skyworks Solutions, and short August 2017 $85 puts on Skyworks Solutions. The Motley Fool recommends Cisco Systems and NXP Semiconductors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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