Technology won’t stop innovating, regardless of the economic turbulence ahead, and that’s good news for Internet of Things (IoT) stocks.
If anything, the lockdowns put in place by many countries in the response to the novel coronavirus has only accelerated the importance of technology solutions in many sectors. And even as countries re-open their economies, consumers and businesses alike will hesitate to return to their pre-pandemic purchasing habits.
People will rely more on technology in their everyday lives. Innovative solutions utilizing IoT will rise in importance.
These 7 Internet of Things stocks are set for serious growth in the coming months:
- NXP Semiconductors (NASDAQ:NXPI)
- Apple (NASDAQ:AAPL)
- Intel (NASDAQ:INTC)
- Qualcomm (NASDAQ:QCOM)
- Analog Devices (NASDAQ:ADI)
- Johnson Controls (NYSE:JCI)
- Rockwell Automation (NYSE:ROK)
While Covid-19 might be the direct catalyst for these stocks at the moment, investors ought to remember that secular trends in cloud computing and connected devices were already heading this direction. The pandemic has simply moved up the timetable.
Internet of Things Stocks to Buy: NXP Semiconductors (NXPI)
NXP Semiconductors reported first-quarter revenue of $2 billion. Industrial and IoT contributed to $376 million in revenue, while Automotive added the most at $994 million in the first quarter. The company forecasts Industrial and IoT revenue growing in the low-single-digits.
China’s return to business will lead to the IoT sell-through. Executive Rick Clemmer said China reapproaching normalcy, “gives [the company] confidence in being able to achieve the 6% sequential growth in the industrial & IoT.“
In automotive, demand for radar and battery management will continue. But NXP has more crossover with IoT and Industrial due to the need for connectivity solutions. The company bought Marvell’s (NASDAQ: MRVL) Wi-Fi and Bluetooth connectivity assets in Dec. 2019.
Looking at valuation, NXP stock compares unfavorably with the S&P 500:
| Stock | Industry | S&P 500 | |
| Value Score | 62 | 57 | 73 |
| Price / Earnings | 100+ | 25.4 | 26.1 |
| Price / Sales | 3.1 | 4.8 | 2.2 |
| Price / Free Cash Flow | 14 | 24.9 | 20.9 |
| Price / Book | 3 | 4.6 | 3.6 |
Data Courtesy of Stock Rover
Notice from the table above that the company’s gross margin is above both the industry average and the index. As IoT becomes a bigger contributor to revenue, profits will increase, too. Based on the 20 analysts covering NXPI, the average price target is ~$110 (per Tipranks).
Apple (AAPL)
Apple Watch represents a core IoT play for the smartphone giant. The company’s latest iteration of the wearable device adds many useful features that fit with the IoT innovation.
Apple highlighted the ECG app on the Apple Watch “used to facilitate remote ECG measurements and recordings for telemedicine usage, reducing patient and healthcare provider contact and exposure.”
The business is so big that it is now the size of a Fortune 140 company. Future releases of the device will add more features. For example, the ECG app signals the company’s interest in developing more health-related monitoring. Eventually, it may further integrate patient health data and send it to hospitals. This will give Watch wearers better health care, as its providers may monitor them in a more timely fashion.
More recently, Apple and Google (NASDAQ:GOOG) updated the device operating system to support Covid-19 based tracking. The Application Programming Interface will allow the system to track people, using Bluetooth, who may have been close to infected individuals.
On Wall Street, analysts think the stock already trades at fair value. Conversely, Apple has a high (operating) efficiency score of 99 and a momentum score of 96 on Stock Rover.
The momentum is mainly about the stock’s uptrend.
Intel (INTC)
Intel announced the purchase of Rivet Networks on May 20, 2020. This will enhance INTC’s secure Wi-Fi connectivity solutions and let it add “more connected devices and higher bandwidth applications for gaming, video streaming and content creation, as well as for processing increasingly larger file sizes.”
Having lower latency network interface cards is an important aspect of IoT. Still, the Internet of Things Group (IoTG) underperformed in the first quarter. Intel said that operating income dropped 3% due to lower revenue from industrial and retail.
So, as IoTG lags in the near-term, investors may hold INTC stock for the strong Mobileye unit’s performance. Mobileye reported revenue growth of 22% and operating income growing by 29% year-over-year.
Investors may also look forward to Intel’s 10-nanometer-based solutions. Its Snow Ridge processor adds to its portfolio of 5G capabilities. And since the cloud and network infrastructure for 5G are growing faster than seasonal trends, Intel stock will benefit from revenue growth in segments outside of IoTG.
Qualcomm (QCOM)
In the last quarter, Qualcomm reported increased demand for connectivity due to the work-from-home environment. This trend should continue in the months ahead because more workers will be connected to their offices remotely.
QCOM stock still trades at a fair discount of 14 times forward price-to-earnings ratio. The stock market is still undervaluing the company’s future IoT solutions. For example, Qualcomm Technologies helps its customers commercialize their products using its platforms. This includes smart bodies, smart cities, and smart homes.
The company counts on NFC, Bluetooth, Wi-Fi, LTE modems, and Snapdragon processors as some of its IoT solution offerings.
Analog Devices (ADI)
Analog Devices describes itself as the pioneer of advancing solutions that “sense, measure, interpret, connect and analyze.” So, it optimizes data quality and analytics. That way, data is relevant, accurate, and complete. To foster its investments, Analog Devices partners with its customers to design solutions. As a result, the partners solve tough IoT challenges in their applications.
In the second quarter, ADI reported revenue of $1.32 billion and EPS of $1.08. It spent 19% of its revenue on research and development. 95% of its resources went to B2B market opportunities. Expect more solutions and new technologies emerging as a result of more customer engagements during the quarter.
Investors may assume the following metrics below in a 10-year discounted cash flow EBITDA model.
| Metrics | Range | Conclusion |
| Discount Rate | 9.5% – 8.5% | 9.0% |
| Terminal EBITDA Multiple | 16.6x – 18.6x | 17.6x |
| Fair Value | $108.21 – $127.19 | $117.38 |
Data courtesy of finbox
Assuming revenue falls this year due to Covid-19 but recovering in the following years, ADI stock has a fair value of around $117.
Johnson Controls (JCI)
Johnson Controls won the “Industrial IoT Innovator of the Year” last year. Through its Johnson Controls Digital Solutions, it is “working with its customers to pull insights that allow for smarter buildings, increased efficiencies and new business value.”
By helping companies innovate and save money by operating more efficiently, the company is a conservative IoT play. More specifically, its connected equipment and services utilize machine learning and predictive diagnostics to increase reliability. Johnson has over 1,600 customers connected across 5,000 buildings and 75,000 equipment and systems. All of these are on an IoT connected platform and solution.
In the second quarter, Johnson reported cash of over $1 billion. Net debt rose $900 million due to share buybacks. The company is positioned to lower its net debt-to-EBITDA leverage to 2 times. EBIT and margins were flat from last year at 8.1% (from the presentation).
As IoT plays a bigger roll in Johnson’s offerings, profitability will climb. On Wall Street, the average price target on JCI stock is ~$33.00.
Rockwell Automation (ROK)
Rockwell Automation is hovering at yearly highs because it continues to differentiate itself from the marketplace. Customers are noticing their IoT offerings. In the second quarter, Compass Intelligence rewarded the company with the Industrial IoT Company of the Year. Gartner’s annual Magic Quadrant survey listed it as a leader in IoT software.
In the second quarter, Rockwell enjoyed strong margins in its Architecture and Software segment. Its solutions and services businesses reported a 1.10 book-to-bill ratio. The company ended the quarter with $640 million in cash and had a total debt of $2.1 billion. Its net debt to adjusted EBITDA ratio was 1.0. Rockwell’s strong liquidity suggests that it has the flexibility to cut capital expenditures to align with lower revenue in the near-term. Rockwell also cut costs and expects to save over $150 million for fiscal 2020.
ROK stock may not have any upside, as analysts have an average target price target of $183. Still, the IoT drive should result in long-term growth in the medium term.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities. Follow Chris on twitter and check out his DIY Value Investing Marketplace guide.