Investing in IoT Stocks and Companies
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You’ve probably heard the statistic being thrown around that 98% of the world’s data was generated in the past two years. That’s probably going to remain true for a while because of technologies like “the Internet of Things” or IoT which describes a world where everything is connected. That connectivity isn’t just everything talking to the cloud, it’s about machines talking to machines or (M2M). Let’s visualize what your day might look like in a world where everything communicates.
When you wake up in the morning and use the bathroom, your smart toilet runs some diagnostics on your urine stream and tells your smart refrigerator to make your Juicero smoothie with a bit more protein. When you climb into your car to go to work, it’s impossible to get in an accident because of telematics, a technology that lets your car talk to all the other cars on the road. Since everything on the road is communicating, you can always be sure you’re taking the best route possible. When you finally arrive at work, you don your cattle tag which lets you know if you’re being a bit too flirtatious with the new intern. When lunch time comes, you visit a burger joint of the future. Your car seat reminds you that your fat ass isn’t getting any lighter, so you put on your smart shoes and go to the gym where a connected weight machine provides you with a workout optimized for you only. After work, you put on your smart golf outfit and go hit some RFID golf balls while having some beer that came from a connected brewery. When you return home, you check the smart baby monitor to make sure the kids are asleep, and pack your smart luggage for a weekend getaway to a smart hotel. As you prepare for sleep, your digital medicine case reminds you to pop a pill before lying down because your connected bed thinks your wife is “in the mood” tonight. You quickly realize that IoT has been able to accomplish what no man could ever dream of doing – it understands the female mind.
These are the sort of futuristic visions we have of a connected world, a place where most first-world problems have been solved and everything you do produces a huge stream of data exhaust. As you have probably guessed, trying to invest in a blanket term for a world where everything is connected can go in lots of directions. We’d like to start with talking about industrial applications for IoT and the concept of a “digital twin.”
IoT Sensors and Digital Twins
Management consultants love to create new nomenclature around technologies that make CTOs look good during board meetings. For example, here’s an equation you can draw on the whiteboard during any meeting so that people will perceive you as a thought leader:
In the world of IoT, you’ll often hear the term “digital twin” being thrown around. It’s something we explored in an article titled, “What is a Digital Twin and Why Should You Care?” Basically, a digital twin is when you create a digital representation of something like a machine on a factory floor or even the entire factory. If an entire factory is equipped with sensors, you can then create a virtual factory that reflects your real factory in real-time. Companies like Humatics can track objects with extreme accuracy, something referred to as microlocation – the Internet of Moving Things. You can then begin discovering ways to optimize your operation because literally everything is being measured with IoT sensors. Some IoT sensors are even battery-free. Eventually when everything becomes covered in IoT sensors, we’ll have a digital twin of the world – a metaverse.
Let’s start with definitions. The metaverse we want to invest in isn’t Facebook’s vision of a world where we all don virtual reality headsets and show off our NFT collections while desperately trying not to offend anyone. We’re interested in “the enterprise metaverse” such as the one envisioned by Jensen Huang of NVIDIA. Once the world’s businesses are emulated in the virtual world, they’ll be throwing off a lot of data exhaust that can be analyzed for insights. It’s a topic we covered in our piece on Real-Time Data Analytics and The Metaverse.
Companies that analyze data exhaust at the speed of business may provide a good pick-and-shovel play on the metaverse, an area referred to as “event streaming,” among other things. Also found within the metaverse will be “digital twins” of the cities we live in.
The Emergence of Smart Cities
If we can create a digital twin for a single factory, we can then start to think about creating digital twins for real estate and even smart cities. The smart city of tomorrow is one where IoT sensors and big data enable us to create better places for people to live, from improved public safety to smart sporting arenas. We’re now able to use spatial data to see how people behave in highly populated areas. If a community is being underserved, smart city urban planners can now design smart buildings that use less energy and are safer thanks to smart security solutions that eliminate the need for rent-a-cops. Smart cities use less of our most precious resource, water, as smart water tech startups optimize the water supply chain at all levels.
Many startups are now optimizing public transport systems in various ways including monitoring traffic using smartphones or even entirely new models of transport such as bike sharing. Soon, we’ll have self-driving taxis ferrying us around or autonomous electric buses silently gliding through our neighborhoods. For those of us that still drive, smart parking apps will ensure we always have a spot to park where a parking meter of the future will ensure parking payments are seamless. Smart city parking apps like Passport may even make meters obsolete.
As you’d expect, smart cities are populated with smart buildings built using sophisticated construction software platforms like Procore. Once built, these buildings can be 3D mapped using solutions like Matterport which provide basic digital twins of smart homes and buildings for the metaverse. It’s a topic we covered in our piece on Matterport Stock: A Richly Valued Metaverse Play.
Smart Homes and Buildings
A smart home is one that minimizes energy use and utility costs while providing a safe and secure location with all the conveniences you’d expect. Perhaps the most noticeable implementation of IoT technology will be in smart homes guarded by smart locks and smart security cameras. Companies like Control4 (now privately held) build home automation platforms that connect all your smart home devices together – lighting, audio, video, climate control, intercom, security, even smart glass. Expect to pay less to run your smart home, as many startups are working on ways to use technology to reduce your utility bills. These same ideas extend to commercial buildings and apartment complexes.
IoT Across Multiple Industries
Areas where IoT applications are making real progress include healthcare with the emergence of new IoT-enabled medical devices that collect loads of data for AI algorithms to analyze.
Supply chains contain a wealth of use cases as multiple startups pursue “Uber for trucking” business models. Truck drivers now use electronic logging devices that are connected to the cloud and help them operate more efficiently. Cargo is now tracked seamlessly using IoT sensors, from the container ship to the warehouse where IoT-enabled inventory management systems take over. When items are returned, reverse logistics powered by AI algorithms route the goods to the optimal place. Technologies like battery-free bluetooth tracking tags are just some of the ways IoT is making supply chains transparent.
In the automotive industry, connected cars now talk to the cloud, and even each other, resulting in loads of automotive data to be analyzed. In fact, all types of vehicles on the road are becoming connected with some startups building devices that let you connect older vehicles to the cloud. The car you will drive in the future may not be the fastest car in the world, but it’s going to be tricked out with a whole lot of auto tech.
Using IoT sensor technology, we’re able to increase yields in agriculture and aquaculture. Food processing is being transformed as we’re now able to trace where every food ingredient comes from. Fruit packing warehouses are now sorting and packing fruit automatically, doing more with far fewer resources. IoT for manufacturing is helping both small and large machine shops do more with less.
Companies like C3.ai are developing full-stack IoT platforms that can be deployed in almost every industry there is. After the company filed for an IPO shares fell more than 90% below their high of $177 a share reached shortly after the IPO. We’re not worried, but we’re watching them closely to see if the business model revamp shows the results they claim it will. Debate surrounds whether C3 is an IoT stock or an AI stock, but they just might be becoming a CRM stock. Then there’s Samsara which has taken in almost one billion dollars in funding for fleet management and industrial automation applications. They have now deployed over 100 billion sensor data points and went public. The company’s SaaS metrics are quite impressive.
In brick-and-mortar retail, IoT use cases abound in areas such as shoplifting prevention, “free wifi hotspot marketing,” or smart labels. Many startups are deploying beacons that track your movements in retail spaces (or any public space for that matter), data that’s used for retail analytics. (Check out our piece on The Physical Web vs. iBeacons vs. Eddystone vs. IoT.) These same beacons can also be used to enhance the shopping experience by providing product information and recommendations to shoppers. And it’s not just about using smart indoor positioning for retail applications. WiFi motion sensors are able to use WiFi signals for various smart home applications like security and even in-home elderly care, with algorithms trained to detect falls and too many trips to the cookie jar.
As you can see, IoT use cases can be found across almost all industries. Let’s look at some stocks that provide retail investors with some pure-play exposure to The Internet of Things.
Investing in IoT Stocks
If you are relatively new to investing, we recommend that you read our Complete Guide to Buying Stocks for Beginners before continuing. Even advanced degrees in finance don’t cover the many pitfalls out there that can befall first-time investors.
Mr. Son over at SoftBank thinks that IoT is shaping artificial intelligence and accelerating human evolution. That’s why he bought ARM, which he may be selling to NVIDIA. Given how thought leaders are predicting that IoT will transform nearly everything around us, you’re probably wanting to “invest in some IoT stocks.” As with many investing themes, it’s not that simple.
Investing in single stocks involves too many risks, so don’t ever try to find “the next Microsoft” because you can lose money as easy as you can make it. It’s always best to diversify across multiple stocks which is why ETFs are so attractive. The problem is that many thematic ETFs which cover the same theme have totally different lists of constituents. It’s hard for people to agree which stocks provide pure-play exposure to a theme. If it’s an active ETF, the weightings won’t tell you anything except the preferences of the ETF’s management team. Even if a particular theme takes off like wildfire, that doesn’t mean you’ll even be able to outperform the Nasdaq (we’re looking at you, solar).
There is at least one ETF covering the IoT theme – The Global X Internet of Things ETF (SNSR) – which we first looked at a few years ago. Since then, their assets under management have nearly doubled to $185 million and their top ten holdings are as follows along with their respective weights.
The ETF has identified 49 stocks that fall under IoT which they define as “the development and manufacturing of semiconductors and sensors, integrated products and solutions, and applications serving smart grids, smart homes, connected cars, and the industrial internet,” with some “5G telecommunications infrastructure and fiber optics” thrown in for good measure. (Make sure to check out our Guide to Investing in 5G Stocks.) Let’s look at some of the names found in the ETF.
A picks-and-shovels play on the IoT theme might be companies that build IoT sensors of which trillions will eventually cover our planet. The ETF includes Emerson, ABB, Honeywell International, and NXP Semiconductors, names which multiple analysts have reached consensus on as providers of IoT sensors. Also in the ETF is a provider of RFID devices and software, Impinj, which should benefit from the explosive growth of tracking devices. In 2020 we updated our readers on the progress being made by Impinj in an article titled A Pure-Play RFID Stock for IoT Investors, then followed that up with a piece titled Is Impinj Stock a Buy at Today’s Prices? Across zee pond in Europe’s largest economy you’ll find TeamViewer – A German Internet of Things Stock, though lately it’s been dropping like a rock as management looks to restore confidence by shoring up the enterprise segment. If you’re interested in smart city public safety, check out our pieces on ShotSpotter Stock: Fighting Crime in Smart Cities and Verra Mobility Stock for Smart Transportation Solutions.
One IoT hardware stock which didn’t make their list is actually in the process of being acquired. Adesto, a company offering the world’s lowest power memory solutions, had an IPO back in 2015. (Nonvolatile memory is important part of IoT infrastructure because it can store information without a power source.) They’re now in the process of being acquired by Dialog Semiconductor.
As for investing in smart homes, you might consider Alarm.com (ALRM) which provides interactive security solutions for home and business owners. They’ve been experiencing strong revenue growth along with profitability.
Alarm.com isn’t the only smart home stock out there, something we talk about in a recent piece titled 4 Pure-Play Smart Home Stocks for IoT Investors. In a follow-up article we pose the question, Should IoT Investors Buy Alarm.com Stock?
Sticking with the smart house theme, we also covered a $14 billion water company called Xylem (XYL) which is making an aggressive push into smart water tech IoT stuff, but doesn’t have the growth profile we’re looking for from a disruptive tech firm. While not in the ETF, it’s a company worth looking at. Another one we came across that allows you to play multiple industries in one go is Trimble Stock – Farming, Construction, and Supply Chains which might trade at a discount because it’s a conglomerate.
A few members of the ETF have exposure to IoT along with a number of other disruptive technologies. For example, Parametric Technology Corporation (PTC) has some cash cows (CAD and PLM) that they’re using to support high-growth areas like IoT and augmented reality, application areas which they’re transitioning to the cloud which can provide revenue uplift. Another company called Ambarella (AMBA) started out focusing on four disruptive technologies including home automation but has since pivoted into using AI to process video feeds from security cameras and automotive camera systems. Speaking of security, be sure to check out Evolv Technology Stock – A Play on Smart City Security.
It’s now trendy to throw around buzzwords like “the Internet of Everything,” and companies that have been spinning their wheels for decades are now suddenly reinventing themselves as “IoT companies.” General Electric is targeting “The Industrial Internet of Things” while Blackberry has now pivoted into “The Enterprise of Things.” Neither company made the cut, but one that did was IBM, a company we’ve looked at in relation to blockchain, healthcare, and hybrid clouds, but never IoT. Since IBM provides very little granularity when it comes to revenue streams, it’s impossible to understand the progress they’re making in any given area.
Looking at where companies’ revenues (and eventually, profits) come from helps us find pure-play IoT stocks to invest in. It’s not an easy task and can be quite subjective. Should we consider companies that are focused purely on industrial automation? It’s something we cover in a piece titled Should You Invest in the Only IoT ETF? Perhaps the biggest opportunity at the moment is in remote connectivity.
Lastly, don’t get involved in any OTC companies trying to tout their IoT capabilities. You will lose your money 99% of the time. Even microcaps that don’t trade on the OTC market should be approached with extreme caution. A company called The Internet of Things is a good example of what companies you should always avoid.
IoT – The Threats
IoT is still having some growing pains as we wait for 5G to give us more bandwidth. There’s a larger IoT connectivity problem that companies are trying to solve, some using global mobile networks and others using satellites. There are also plenty of concerns around IoT security and privacy.
There are also some understandable privacy concerns around IoT technology that haven’t gone unnoticed given that audio beacons now monitor your smartphone while computer vision-enabled CCTV cameras track your movements. While most people probably draw the line at RFID chips for humans, today’s emerging IoT technologies present new risks that need to be managed appropriately.