(Fool) -- Most of us would probably describe the internet as a vast network of websites, social networks, and videos that users can virtually access with computers and mobile devices.
While this would undoubtedly describe the ways most of us interact with the internet, it fails to encompass its vast array of connections and reach.
The internet is much more than a collection of billions of web addresses; it is the digital network connecting each website to billions of connected devices.
What is the Internet of Things?
The internet has expanded to now connect a number of devices beyond our familiar computers, tablets, and smartphones. Collectively, these connected devices make up the Internet of Things(IoT), a network of billions of appliances and gadgets that collect, receive, and transmit data. These devices can be used to automate, control, monitor, or track a wide range of formerly "dumb" devices -- things that once did not communicate to other devices or connect to the internet -- such as:
- Automobiles
- Lights
- Medical devices
- Refrigerators
- Security systems
- Smart speakers
- Televisions
- Thermostats
- Transportation infrastructure devices (e.g., electronic toll collections, smart traffic controls, etc.)
- Wearables
- And more
What are smart devices?
These appliances, when capable of communicating with users, other devices, or the internet, are often referred to as "smart devices." The adjective "smart" generally means the device is part of the IoT and, as such, is generally capable of more than what the appliance is traditionally known for doing.
For instance, a smart TV means the television can browse the internet, download apps, or be controlled by other devices. A smart doorbell might send a push notification to your smartphone when rung. A smart refrigerator can order food that is running low.
Popular smart-home devices
Several of today's largest companies are now making smart-home speakers that can control the rest of the home's smart devices from one central location.
For instance, Amazon.com sold a "record-breaking number" of devices powered by Alexa, its AI platform in the 2018 holiday season quarter, with the Echo Dot, its voice-controlled speaker, being the highest-selling unit globally. The Alexa platform now has 50,000 skills, ranging from streaming music, citing facts, playing games, and of course, ordering products from Amazon.
Alphabet's Google Home devices also sold millions of units in 2018 and can work with more than 5,000 different smart-home devices across 150 different brands.
Alphabet brags that the device was used to make 16 million recipes during the 2018 holiday season.
Apple's HomePod, powered by Siri, has not enjoyed nearly the same popularity as the Google Home or Echo Dot devices, probably owing to its much higher price point.
That said, Apple continues to believe there is a market for a smart-home speaker that prioritizes privacy and sound quality above all else.
How big is the IoT?
There are many contrasting projections concerning the growth of the installed device base of the IoT over the coming years.
IHS Markit, a global information provider, estimates that the total number of IoT devices will surge from 27 billion in 2017 to 125 billion by 2030.
Cisco estimates that it will be much higher by then, believing that 500 billion devices will be connected to the internet in 2030. Global consulting firm Bain believes spending on the IoT will grow to $520 billion in 2021, more than double the $235 billion that was spent in 2017.
When it comes to investing, the better approach is often to be generally right than precisely wrong. In other words, the important takeaway from these statistics isn't the exact number of devices that will be connected in a certain year or the precise spending that companies will invest in this industry.
Rather, the relevant fact is that the IoT is still growing by leaps and bounds, with a long runway still ahead of it.
The biggest pros and cons of investing in the IoT
One of the biggest tailwinds for the IoT is the coming of 5G wireless networks. 5G, the fifth generation of wireless networks, will bring:
- Faster network speeds -- some experts claim up to 100 times as fast as 4G networks.
- Lower latency (the delay between sending and receiving a signal).
- Greater data capabilities, meaning more data will be able to be carried across mobile signals at once.
By increasing wireless networks' speed and reliability, 5G will enable a whole host of applications, including autonomous vehicles, mobile payments, and virtual reality.
This will literally increase the real-world number and use of IoT devices.
The greatest risk facing the IoT is that while it is big and growing, its future growth rate remains a projection.
Nothing is certain to come to pass. 5G networks might launch slower than anticipated. Fully autonomous vehicles might prove to be decades away.
Virtual reality may never see mass adoption among consumers. Industries may never find uses or ways to analyze the troves of data IoT can give them.
ETFs, the easy way to invest in the Internet of Things
With all of the money pouring into the IoT in the years ahead, it's only natural for investors to wonder how to capitalize on this huge trend. While we'll discuss individual stocks shortly, there is another, easier way to attempt to profit: The Global X Internet of Things ETF.
An ETF, or exchange-traded fund, is a basket of equities that are grouped together under one trading entity.
Many, as in this case, are grouped together under common sectors and themes. The Global X IoT ETF contains large holdings in a wide range of diverse companies, including:
- DexCom, which designs and produces health-care monitoring devices for diabetics.
- ADT, the alarm company.
- And Skyworks Solutions, an analog semiconductor maker whose chips enable devices to connect to wireless networks.
In other words, buying this ETF can instantly diversify investors across industries, yet still be centered on the common theme of the IoT. Investing in ETFs can also be a smart way to mitigate risk through diversification as well as take advantage of macro trends without the heavy time investment that studying individual stocks involves. While this ETF could very well beat the S&P 500 index in the years ahead, I believe there are still better ways for investors to profit from the Internet of Things.
The best IoT stocks for 2019
| IoT Company | Why It's a Great IoT Investment |
|---|---|
| Alphabet | The search giant has already sold millions of its Google Home smart-home speakers. |
| Amazon.com | Amazon has used its AI-powered Alexa platform to equip its hardware devices, including the popular Echo Dot, with more than 50,000 skills. |
| Apple | While its HomePod has yet to take off, its wearables division, led by the Apple Watch, is gaining in functionality and popularity. |
| DexCom | The medical-device company makes glucose-monitoring devices for diabetics. |
| GrubHub (NYSE:GRUB) | As mobile devices grow, food-delivery transactions will only grow more painless. This best-in-class food-delivery platform should be poised to benefit. |
| Honeywell International | This manufacturing giant is beginning to make several industrial devices with IoT capabilities. |
| Mastercard (NYSE:MA) | This payments network should benefit from the explosion of mobile payments as transactions that were once negotiated in cash are done electronically. |
| Skyworks Solutions | This company's analog semiconductor chips are essential for devices connecting to wireless networks. |
| Verizon Communications (NYSE:VZ) | This telecom powerhouse might be the first to deploy 5G wireless networks around the U.S. |
| Visa (NYSE:V) | The card network will directly benefit from the explosion of digital payments routinely conducted by IoT devices. |
DATA SOURCE: GOOGLE FINANCE.
Let's take a closer look at some of these companies to see why they make such good investments today.
DexCom: Continuous monitoring for diabetics
DexCom is a health-care device company that designs and develops continuous glucose monitoring (CGM) systems for diabetics. A small sensor, placed just under the skin, measures glucose levels every five minutes. An adhesive patch holds the sensor in place throughout the day. A small transmitter then sends the readings to a compatible mobile device, usually an Android or iOS smartphone.
DexCom's CGM solutions are shown to reduce users' A1C scores, reduce hypoglycemia, and provide active monitoring at night, making them an extremely attractive value proposition for diabetics.
The company expects to grow revenue by 15% annually through 2023, a reflection of its huge total addressable market and the number of patients it has yet to reach. Over the same period, it expects to grow its operating margin from negative 3% to 15% through a variety of cost controls and the winding down of research projects.
GrubHub: The food-delivery app
GrubHub is the country's largest digital platform for placing restaurant take-out and delivery orders. As the devices that connect to the internet increase in number, mobile platforms for ordering delivery should only grow more ubiquitous. In addition to being a huge mobile platform, GrubHub is also one of the best ways to invest in the growing food-delivery boom.
The company finished 2018 with 17.7 million active diners, the number of unique diner accounts that have placed an order on the company's platform in the past year. During that same time, there were also 467,500 daily average grubs, or DAGs, which the company calculates by taking the number of total orders and dividing it by the number of days in the measured period. Both figures were up approximately 20% from 2017 totals.
GrubHub is constantly working to improve its mobile interface so hungry diners can find exactly what they're looking for in a quick and seamless process. In a 2018 conference call, founder and CEO Matthew Maloney stated:
Continuous improvement of our diner-facing product remains a priority and a source of growth for us. Recently, we reengineered our mobile experience implementing a new, cleaner tile layout for restaurant search as well as improvements to navigation and a more photo-forward approach to discovery.
GrubHub is also providing mobile support for many of its partners, including Yum! Brands' Taco Bell and KFC chains. In late 2017, the company partnered with the two iconic fast-food brands to become their exclusive digital online and mobile ordering platform. When asked if GrubHub would be integrating its platform with the restaurants' mobile apps as well, Maloney responded:
[W]e're powering their white label for everything. All transactions and their websites ... We are not only supporting their restaurants on our marketplaces and across our affiliate network, but we are also supporting them on all of their white label properties. We're providing order management, including pickup and delivery for KFC and Taco Bell ... It's a very close, unique partnership in the space because we're extremely aligned and both parties are agnostic to what channel the order comes in on.
It doesn't take a crystal ball to see that more restaurants, especially smaller chains, and stand-alone locations would want to outsource their mobile offerings to GrubHub as well. While the company faces competition from the likes of DoorDash and Uber Eats, GrubHub seems to be one of the few winners that will emerge from the pack for the mobile ordering of food delivery and takeout.
Mastercard and Visa: The credit-card networks
Mastercard and Visa sport similar business models, essentially collecting tiny fees for every transaction facilitated over their respective networks. While they obviously compete with each other and other credit-card networks for market share, their primary rival remains cash. Mastercard CEO Ajay Banga estimates that about 80% of the world's transactions are still facilitated with currency.
As such, trends like e-commerce have been a boon for Mastercard and Visa. Visa CFO Vasant Prabhu explained at a recent analyst conference that online purchases have been a huge boon for credit-card companies:
E-commerce is growing five times as fast as face-to-face transactions. And in an e-commerce transaction, the propensity to use a Visa card is twice as high as a face-to-face transaction. So something growing five times as fast where your propensity to be used is twice what it might have been. That's phenomenal.
Not only does mobile commerce continue this trend, it accelerates it. The more devices connected to the internet, the easier it will be to make electronic payments where cash was previously used. This can be done through apps, such as those hosted by Domino's and GrubHub, or even via sensors on your vehicle's gas tank that will automatically pay for the gas as you pump. As more devices come online, transactions that traditionally had to be negotiated using cash -- think parking meters, toll-booth collections, etc. -- will now be facilitated with digital payments.
Skyworks Solutions: Connecting the Internet of Things (IoT)
For those not familiar with the company, Skyworks Solutions designs analog semiconductors, a key component for any connected device to wireless networks such as LTE or Wi-Fi. Most of Skyworks' revenue comes from smartphones, and its biggest customer by far is Apple.
As the advent of 5G approaches, more devices will be connected than ever before. For payments purposes, this includes things from smartwatches that wearers can use to make purchases at stores to cars that will automatically pay the pump once the nozzle is inserted in the vehicle's gas tank. All of these devices will need to connect to a network to make the payment, and the more of these connected devices there are, the more the world will need Skyworks' chips.
In a 2019 conference call, CEO Liam Griffin specifically called out several industrial and consumer applications as catalysts for IoT device growth once 5G network coverage spreads:
With expanded 5G network capacity on the horizon, we expect 75 billion devices will be connected by 2025. That's three times today's installed base. Leveraging our leadership across all major wireless standards, including ... 4G LTE and 5G, we are well-positioned to capture a disproportionate share of this growth, particularly with the advent of autonomous vehicles, virtual reality, Industrial IoT, and frictionless commerce.
Skyworks has shown a clear ability to profitably grow as smartphone architecture grows in complexity and connected devices in numbers. In the 2018 fiscal year, Skyworks' non-GAAP EPS was $7.22, more than triple its 2013 total of $2.20. That's greater than 27% annual growth over a six-year time frame.
Verizon: The 5G wireless network leader
The faster network speeds that the next generation of wireless coverage offers are essential to the growth of the IoT. While other networks have begun to close the U.S. wireless coverage gap between their own infrastructure and Verizon's, I believe Verizon will deploy 5G coverage in more major domestic markets sooner than the rest. As the 5G race between the telecom carriers really heats up, I believe Verizon's quality will, once again, clearly surpass its competitors'.
There are several reasons I think Verizon occupies the inside lane in this race.
For starters, Verizon was the first to launch a commercial 5G service. In late 2018, Verizon launched 5G Home, a 5G-internet service for residences in Houston, Indianapolis, Los Angeles, and Sacramento.
This will give Verizon a head start over its rivals as it figures out the best way to install and maintain this type of service. In a recent conference call, CFO Matt Ellis explained, "And we've seen performance as we've expected since we started doing those installs, the technology works. Our customers are getting the experience they expected."
In tests leading up to the 5G Home launch, Verizon engineers were pleasantly surprised by the real-world capabilities of the network. For instance, in an interview with Motley Fool contributor Nicholas Rossolillo, Verizon Vice President of Network Engineering Mike Haberman stated, "Some of the examples we use were it got higher up buildings, up to the 19th floor of buildings, when we didn't think it would reach that high. We were seeing locations 2,000 feet from the cell site and still having good speeds."
Verizon also has higher aspirations for its 5G networks than just faster smartphone speeds, such as its smart-city initiatives, where the company is working with specific municipalities to use the technology to solve different pain points around the city.
What might make Verizon a particularly interesting stock for some investors is that it sports a dividend yield that is consistently over 4%. For income investors looking to invest in the growing mobile payments trend, Verizon might be their best bet.
IoT: A trend from which all investors can profit
Since the inception of the internet, mankind's tendency to use technology to make the world a smaller, more connected place has only accelerated. I do not think this race to connect to the world around us will slow down, much less cease, any time soon. IoT represents one of the best ways to invest in this trend.
As you can see, there are a number of great companies to choose from that have exposure to this sector, ranging from the tech companies making the smart devices, to the makers of the components, to the providers of the services that will be offered through these devices.
These companies also encompass different styles of investing. For income investors, there are stocks such as Apple and Verizon that pay growing and hefty dividend yields.
Value investors might be interested in beaten-up semiconductor stocks or undervalued telecom carriers that stand to benefit from IoT's growth. Growth investors will probably be attracted to the big tech and payments companies. No matter your style of investing, I am confident this trend can help all investors profit and beat the market in the years ahead.
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