By Tim Beyers
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|
DATA SOURCE: S&P GLOBAL MARKET INTELLIGENCE.
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.
While some may know Honeywell for smoke alarms and other household musts, the company is putting plenty of marketing muscle into its signature suite: "IIoT by Honeywell."
Say what you want about the name but the product appears to check all the boxes: connect sensors to the cloud, provide detailed analytics on the resulting data, automated systems that trigger alerts when problem patterns emerge. Honeywell also claims the customers of its platform are more likely to get maximum use of industrial assets and use data to optimize performance.
Whether or not you believe the platitudes there's no disputing the numbers. According to S&P Global Market Intelligence, Honeywell has produced over $4 billion in free cash flow every year from 2015 through 2018 . So while there may be others on this list with proven industrial technology it appears Honeywell's positioning as a trusted IoT supplier is secure.
Does that make the stock a buy? Not necessarily. Honeywell tends to trade at a slight premium to its competitors in the industrial conglomerates segment, according to data from S&P Global Market Intelligence. That's a less-than-ideal price for a company whose history includes slow and declining revenue growth.
IBM shows a Smarter Planet exhibit at Disney's Epcot. Image source: IBM
Big Blue bears significant responsibility for the popularity of the IoT. In November 2008, at the apex of the financial crisis, IBM's then-CEO and Chairman Sam Palmisano gave a speech to the Council of Foreign Relations laying out a vision for a Smarter Planet. From a retrospective posted at the IBM website:
In his speech, Palmisano painted a picture of a world made up of a trillion connected and intelligent things, and the oceans of data they produce.
Smarter Planet became IBM's first commercial foray into IoT. Today, Big Blue uses the Watson artificial intelligence engine to make more of the data piping through cities, cars, factories, and more. It's a scaled-up business with, as the company calls them, "solutions" for:
- Monitoring and extending the life of expensive assets such as drills, turbines, generators, pipelines, and the like.
- Tracking and optimizing every detail of leased facilities to maximize every dollar spent on workspaces.
- Capturing customer requirements and organizing workflow for maximum efficiency in designing and bringing to market new industrial systems.
And like Alphabet, Amazon, and Microsoft, IBM has Watson in the cloud for organizations to connect their IoT systems and analyze data at scale. Overall, IBM is battling Google for third place in the public cloud market and is relying on its $34 billion purchase of Red Hat to further bolster its efforts to get customers to trust it with large-scale projects.
Financially, Big Blue has spent years struggling to find new sources of growth. Revenue declined annually each year from 2014 to 2018. Gross margin has also contracted during that time, as has cash flow from operations. (Down 1.4% annually over the last five years.)
The good news? Watson appears to be the most mature of the nascent A.I. platforms and a potentially ideal system for managing IoT projects at scale. Mix in Red Hat's proven appeal with software developers and Big Blue's long history of providing IT services to the world's biggest companies, and it's possible IBM nets the largest share of dollars spent on industrial IoT projects over the next five years.
That's a potentially appealing position for buy-to-hold investors, made more so when you realize that IBM has a history of paying out close to a third of its annual cash from operations (CFFO) as dividends. Big Blue tends to generate at least $15 billion in annual CFFO and at least $12 billion in free cash flow.
Sensors and connectors are the glue that allows IoT data to flow between and through connected devices. QUALCOMM is in the business of making those connections with wireless technology. The company is focusing efforts in four areas:
- Consumer electronics that are wirelessly connected, including cameras, drones and robots, remote controllers, printers, and wearable technology such as fitness trackers.
- Smart cities technology for improving connectivity across transportation, energy, buildings, and city infrastructure.
- Smart homes technology for connecting appliances, lighting, and security system while also orchestrating automated systems such as thermostats and electronic locks.
- Voice and music technology to bring wireless sound to headphones, wireless speakers, smart speakers, and home theater systems.
In virtually all these projects, QUALCOMM is selling its chip designs and and other "SoC" — or, "system on a chip" — platforms upon which partners build products for use. It's an old model that's served QUALCOMM well over the years. In fact, the company's original innovations in mixed-signal wireless CDMA chips annually accounts for over $5 billion in licensing and royalty payments from QUALCOMM partners.
Whether the company finds the same licensing opportunities in the IoT is an open question at this point, as is the durability of the company's competitive advantage. Questions linger over the legality of QUALCOMM's pricing strategy with respect to licensing as competition heats up in the greener fields of its business — notably, chips to support the connectivity needs of the IoT. Last year QUALCOMM pledged $44 billion to acquire IoT peer NXP Semiconductors to improve its positioning in the space but the bid failed.
So how does QUALCOMM fare on its own? Both revenue and cash flow growth have been woefully inconsistent over the last five years. For now, there's no reason to believe we'll see a change in the status quo anytime soon.
Whereas QUALCOMM specializes in the wireless connections that form the backbone of the IoT, Analog Devices makes many of the "things" that form the Internet of Things. From sensors and converters to transceivers and processing systems, Analog Devices' products exist at the industrial edge of the industrial IoT.
Think of Analog Devices as the front line of the industrial IoT, where small single-purpose machines take measurements, sense changes, and report anomalies in the integrity of the network. Most of these basic systems capture data in a raw form to be converted into digital signals — 1s and 0s, essentially — that are readable by computers in the cloud.
You might expect that with the rise of a more connected world with the IoT at its core, Analog Devices' positioning would make it essential for the era in which we live. And you'd be right. Over the five years from 2013 to 2018 Analog Devices has improved revenue and cash from operations by 17.3% and 21% annualized, respectively. The company has also grown its dividend per share by over 7% annualized over the same period, adding a 100%-plus return in the share price. More market-beating gains should follow, presuming the company's position as a premier supplier of the sensors and converters that comprise the front line of the IoT remains largely intact.
Like the other industrial conglomerates on this list, Emerson Electric is jockeying to get as much revenue and profit as it can from providing technology that makes the industrial IoT more functional. The company's Plantweb digital ecosystem is its top-billed IoT offering for collecting, analyzing, and preserving the data that describes the physical health and performance of factory assets.
It's a good story, but it's also dependent on industrial companies such as oil and gas drillers to be spending on exploration. That's a hit-and-sometimes-miss position to be in, which makes Emerson more of a cyclical business than a steady performer. (Total revenue is down 5.7% annually over the five years ended on June 30, 2019.)
Cash spent on acquisitions is a key part of the long-term story, and so far the news isn't good. Emerson spent $2.9 billion cash on acquisitions in 2017 and then $2.2 billion the next year. Adding the $1.2 billion-plus Emerson pays in annual dividends plus another $600 million to $700 million in capex eats all of the company's cash flow from operations — and then some — which means there may not be enough for Emerson to sustainably pay a 3%-plus dividend.
If you work in an office building in any city in the U.S. — or anywhere around the world, for that matter — Johnson Controls may be helping to keep the lights on, the office cool (or warm in the winter), all while monitoring for security breaches and energy inefficiency. Basically, Johnson Controls wants to give your office building a brain.
It's an interesting but old idea. Building management systems have been around since the commercial adoption of heating ventilation and air conditioning (HVAC) systems, which were invented in the early 1900s. Today's building management systems leverage the IoT for the same reasons factories and oil platforms do: to monitor systems to maximize their useful life and to automate any process that can be automated. Shutting off lights when motion sensors no longer detect movement in a section of the building, for example.
Johnson Controls provides a full range of industrial HVAC equipment that's cloud-connectable plus building management software for monitoring the health of the systems built to keep workers safe, comfortable, and productive. That's a $30 billion-plus business as of this writing, but Johnson Controls used to be bigger. In 2018 the company sold its battery making division, Power Solutions, for $11.4 billion in net consideration.
The company has significantly strengthened its balance sheet since the sale, paying off over $3 billion in debt while adding nearly $3.5 billion in cash. JCI also appears on track to sustainably produce over $1 billion in annual free cash flow, enough to fund its dividend payments and make this stock a potentially attractive long-term hold for the first time in years.
The Internet of Things is constantly changing and shifting — and, moving. NXP Semiconductors creates "endpoints" for intelligently tracking data from the systems in the IoT. Smart automobiles are a particular specialty but the company also has broader ambitions to serve the industrial IoT. NXP's microcontrollers, power management chips, radio frequency ID chips, sensors and more can be made to support smarter cities and smarter factories as well as smarter cars. To that end, NXP has a Rapid IoT Prototyping Kit to help designers and developers bring intelligence to any device that can be networked.
NXP's strategy has drawn significant interest, most recently from QUALCOMM. The bad news? Good strategy hasn't always translated to good financial results. Revenue has grown just 12.3% annually over the past five years, a sharp deceleration from where the company was in 2016. Fortunately the company is more streamlined and is generating over $3 billion in free cash flow, a positive trend that should allow NXP to strengthen its balance sheet and reinvest in its IoT products.
In the meantime, the stock is trading for historically low multiples to sales and projected earnings as of this writing. Even modest improvements in NXP's IoT business over the next few years would add meaningfully to profits and cash flow and drive the stock higher.
For over a century, Rockwell Automation has been providing the foundational infrastructure of industry. Today that includes the ThingWorx IoT platform for visually connecting devices, data sources, and applications to automate processes across plant facilities. Sound good? There's one catch: engineers at Rockwell partner PTC (NASDAQ: PTC) are the brains behind ThingWorx. So it should be no surprise that in June of 2018 Rockwell announced plans to invest $1 billion in PTC equity. The company held roughly 9.2% of PTC's shares outstanding as of this writing.
Rockwell needs the help. After two years of declines, revenue grew 7% in fiscal 2017 only to to 5.6% in fiscal 2018 and just 1.4% in the trailing 12 months ended on June 30, 2019. Rockwell's once cash-rich balance sheet deteriorated over the same period and is saddled with just over $1.3 billion in net debt (i.e., the remaining debt after subtracting excess cash) as of this writing. Rockwell needs industrial IoT projects to be a catalyst for its business.
A final word on IoT stocks to watch
The Internet of Things is complicated. Billions of sensors and transceivers built into lights, HVAC systems, pipelines, and generators make cities, factories, and workplaces smarter while voice-activated speakers and smart-sensing cameras enhance how consumers experience the world while using the cloud to connect to our digital personas. We've never been more interconnected. That's both a plus and a minus for investors.
Because the IoT weaves together the fabric of our lives -- the homes where we live, the buildings where we work, the cars we drive, and so much more -- it's likely we'll see increasing government oversight of everything connected to the internet. When -- not if -- regulation comes, it'll makes headlines in major news outlets so you won't have to look far to find out what's at stake. Just don't panic! All tech-driven industries are subject to increased regulation at some point. Think of Amazon finally submitting to adding state sales taxes on purchases after years of claiming the internet made it exempt. The new rules did little to slow the company's march toward dominance and today it remains the world's top e-commerce brand.
How can we profit from this movement as investors? Any of these three options could serve you well, depending on your ability to endure some losses for the promise of long-term market crushing gains:
- Buy all 10 of the biggest IoT stocks as a diversified portfolio to get exposure to the trend while limiting losses and volatility.
- Research and invest in start-ups and fresh IPOs creating innovations in how the IoT functions, spreading your bets in hopes of getting an Amazon-sized winner.
- Buy the best of the biggest IoT stocks and plan to hold for the long term.
I prefer the third option, and Intel is my choice as one of the top Internet of Things stocks. The company is an established position leader in data center processors, and we're going to keep needing more powerful data centers to manage IoT sprawl around the globe. Intel is well-positioned to beat the market over the next five years.
Whatever path you choose for investing in the Internet of Things, commit to at least five years of holding fast. The IoT is a long-term trend. Profiting from it requires the discipline to buy to own for years.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Tim Beyers owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Microsoft. The Motley Fool owns shares of Intel and Qualcomm. The Motley Fool is short shares of IBM and has the following options: short September 2019 $145 calls on IBM, long January 2021 $85 calls on Microsoft, long January 2020 $200 calls on IBM, short September 2019 $50 calls on Intel, and short January 2020 $200 puts on IBM. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.
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