Many investors have probably heard a lot about the Internet of Things (IoT), which is the connection of all sorts of everyday devices to the internet so that users can track data or automate their lives. It's a broad and rapidly expanding segment as the world grows more connected. Smartwatches, fitness trackers, thermostats, refrigerators, industrial equipment, and even some running shoes are all part of the IoT.
Much of the progress in the space has been made, unsurprisingly, by big tech companies and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google is a prime example. Google positioned itself prominently by purchasing the Nest smart thermostat company in 2014, introducing new smart devices through that brand, and by releasing its own smart speakers, called Home, to control other connected devices around the home.
But the company is hardly the only one that is poised to benefit from the IoT. Investors who like to roam off of the well-worn path should take a close look at what Skyworks Solutions (NASDAQ: SWKS), Sierra Wireless (NASDAQ: SWIR), and Cypress Semiconductor (NASDAQ: CY) are doing to dominate the Internet of Things market.
Image source: Getty Images.
A growing IoT leader
Skyworks Solutions makes connectivity chips, power amplifiers, and other semiconductors for the world's biggest tech companies, including Apple, Samsung, Amazon, and a host of others. Skyworks is a major supplier of chips to the iPhone maker, and it earns the vast majority of its top line by doing business with Apple, but it has set its sights on the IoT as well.
One of the company's most significant IoT opportunities lies in its chips being used for semi-autonomous and autonomous vehicles. Cars have been adding more internet-connectivity technology for years, and the continual shift to more self-driving features means that more vehicles will need to collect, send, and share data than ever before.
In fact, Skyworks says that by 2020, one single semi-autonomous vehicle will collect and send 4,000 gigabytes of data every single day. When you consider that the number of truly driverless cars is expected to reach 33 million by 2040, then it's easy to see how much potential Skyworks has in the connected vehicle space.
What's great about Skyworks' IoT position is that it's not just theoretical. The company is already selling IoT chips and its "broad market" revenue -- which includes Internet of Things hardware sales -- already makes up 27% of the company's top line and has an annualized run rate of $1 billion.
The company's broad market sales have been consistently growing by double-digit percentages and management sees no signs of it slowing down. Skyworks CEO Liam Griffin said on the company's February earnings call that this segment will continue to grow by midteen percentages "for the foreseeable future."
Skyworks' shares have been on a bit of a rollercoaster ride over the past 12 months, but if you take a wider look at the company, you'll see that this IoT connectivity play has delivered more than 360% in share-price gains over the past five years. I think there's still plenty of room left for this company to keep climbing as it taps into the IoT even more in the coming years. If you consider that Skyworks' shares trade at just 13 times forward earnings, the company's stock looks downright cheap right now.
The closest thing to an IoT pure play you can get
There aren't many companies that are solely focused on the Internet of Things market -- except for Sierra Wireless. The company makes wireless chips and modules that are used in wearables, connected vehicles, smart cities, and more, enabling the items to communicate using Bluetooth and cellular signals.
Hardware sales from its OEM solutions segment account for most of Sierra's revenue and brought in $135 million in the first quarter of this year. Although sales in the OEM solutions business have slowed down a bit, which has caused some investors to panic, there's still plenty of long-term potential for this company if you know where to look.
Sierra boosted its IoT services revenue to $22.5 million in the first quarter of 2018, up nearly 218% year over year, thanks in part to its purchase last year of Numerex, a company that offers managed IoT enterprise solutions. That growth means that the IoT services business now accounts for 12% of Sierra's top line and is the company's second-largest revenue segment. Additionally, Sierra now gets more than 10% of its total sales from recurring revenue, and management says it's on pace to have "at least" 15% of sales from recurring revenue in the next few years.
So why is that important? A big part of Sierra's IoT future will come from its ability to sell hardware and services to its clients. The Numerex purchase opens up the possibility of steady recurring IoT revenue for Sierra (as opposed to one-time hardware sales) and it puts the higher margins of IoT services businesses in play as well.
In addition to this recurring revenue opportunity, Sierra is poised to benefit from the recent hardware deals it's made with some large customers, including an agreement with Volkswagen to supply chips for its vehicles. Sierra's management said on the most recent earnings call that shipments of those chips will start later this year and the company will start seeing the revenue benefits in 2019 and 2020.
Investors looking to play the long game in the Internet of Things -- and who are willing to accept some share-price volatility for huge exposure to this trend -- should give Sierra a close look. The stock is trading at 12.8 times Sierra's forward earnings, which makes the company look like a bargain.
A rising star in the Internet of Things
Cypress Semiconductor sells an array of wireless chips that can be found in smart-home speakers, as well as semiconductors for the automotive market.
On the most recent earnings call, CEO Hassane El-Khoury said the company's "unique and powerful IoT capabilities have positioned Cypress as the No. 1 IoT partner for embedded solutions" for smart-home applications. That's worth pointing out because 31% of Cypress' revenue comes from sales of consumer devices, which includes wearables, smart-home speakers, and connected cameras.
The company has been in the midst of a massive transition to the IoT over the past couple of years, beginning when Cypress purchased Broadcom's IoT assets back in 2016. That move, along with some restructuring of the company's legacy businesses, caused Cypress' earnings to slide in previous quarters. But the company is starting to turn things around. In the first quarter of 2018, sales grew by 9.5% to $582 million and Cypress reported net income of $9.1 million, moving back into positive territory after a loss of $43 million in the year-ago period.
Investors should pay particular attention to the company's automotive sales segment, which accounts for 34% of total revenue. Cypress' automotive chip sales grew by 15% in the first quarter, and there are strong signs that the automotive market could continue to drive growth in the coming years. Research from IHS Markit indicates that the automotive semiconductor market will grow from $37.5 billion last year to $58 billion by 2024.
Cypress' growing leadership position in the consumer and automotive IoT spaces should make this company a solid contender for potential IoT investors. Not only is Cypress delivering on its shift to the IoT, but its stock price has already climbed more than 30% over the past 12 months, and its shares trade just 12.4 times forward earnings. The combination of sales growth, market leadership, and cheap share price make this company a virtual no-brainer IoT choice.
It may be easy to dismiss the Internet of Things as a fad, but companies are taking its potential very seriously, and investors should, too. Chip giant Intel (NASDAQ: INTC) estimates that the vast IoT market -- which includes IoT device sales and cost-savings -- will be worth a staggering $6.2 trillion by 2025.
Investors who jump in early will likely reap the benefits. Just remember to be patient while this market evolves -- many companies are still transitioning to the IoT, and it may take some time before their moves trickle down to the bottom line.
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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. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Sierra Wireless, and Skyworks Solutions. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.