Contents Introduction Skyworks Solutions (SWKS) Cypress Semiconductor (CY) Sierra Wireless (SWIR) Silicon Labs (SLAB) Rockwell Automation (ROK) Global X Internet of Things Thematic ETF (SNSR) Bottom Line 3 6 7 8 9 10 11 12 2
Introduction There are a lot of buzzwords that get thrown out regarding the market these days for new industries and technological advances. In the past few years alone, we have seen the rise of wearables, cloud computing, and social media just to name a few. We can argue if these have lived up to their billing, though there are always big winners even if some of the industry components have fallen by the wayside, such as with Facebook and its social media dominance. But regardless, we think that for 2017, investors need to focus on one industry that looks very likely to live up to the hype, the Internet of Things. What is the Internet of Things? In case you are unfamiliar with the topic, the Internet of Things or IoT for short is basically a world of smart devices that are connected to the internet in some fashion. In other words, everything from your stove and television to medical instruments and wearable computing devices are connected to the internet. What is the purpose of this you might ask? Well, efficiency is really at the heart of this development, as users can now do things like turn off their lights with their phone, check on their house from a mobile device, or send medical information to a cloud service so that doctors know that everything is alright. Arguably the most famous example of the Internet of Things right now is the Amazon Echo. This device takes verbal commands allowing you to play music, control devices connected to the Internet, and even order things from Amazon too. Several here at Zacks own the Echo and the lead author of this piece owns two in his condo and we can all attest to using them on a daily basis. And with Google launching their own device (called Home) in this market, expect to hear a lot more about the smart home in the coming months too. 3
The Internet of Things goes far beyond home applications though, and this IoT analytics site has 10 such applications for the technology right now. These range from everything from consumer to industrial, and some are taking place right now and you might not even realize it. For example, Intel is working with the city of Berlin right now to develop a smart system for parking spots. Users will be able to see on their phones where current open spots are, helping to make for a more efficient and easier commute. Another example is in Dublin, in particular with their smart trash bins. The bins are Wi-Fi enabled and they send a text and email to the relevant waste management division to let them know that the trash is getting backed up and it is time to pick it up. Once again, a simple idea, but something that definitely should boost efficiency and make lives a lot easier in the process too. Why Invest in This Market? But forget about convenience when thinking about this market, as the real promise here is the incredible growth potential. The market is still in its infancy, and it is expected to take the world by storm over the next few years, as you can see in the chart below which comes to us from Global X Funds: 4
As more devices like the Amazon Echo or Google Home find their way into living rooms across the country, it will further increase demand for other smart products, thereby increasing the size of the Internet of Things ecosystem. Meanwhile, the many city and industrial applications will be prized for their ability to cut costs and improve efficiency, especially as pilot programs in Europe and the United States go beyond their initial stages. And let s also not forget what a great opportunity this is for the semiconductor sector at large too. This market segment was arguably in trouble given the rapid decline of the PC market, but with so many new devices all needing semiconductors, they have a huge new market at their disposal, potentially creating a new golden age for this industry in the process. And if we stretch things out even further to 2025, we can see that the base of connected devices is only expected to grow to even greater heights. Industrial and consumer applications will likely dominate, but there is clearly a big market for a wide variety of devices and the IoT in general, as we can see in this chart that was pulled from a recent analyst day presentation for Silicon Labs: How to Invest Fortunately, there are several great ways to obtain exposure to this market, both with stocks and ETFs. So, check out any of the stocks below for some quality exposure to this market segment, or consider an ETF approach if you want to just play the overall trend: 5
Skyworks Solutions (SWKS) Skyworks has its hands in a number of IoT segments, including the automotive, smart home, and industrial, just to name a few. In particular, Skyworks focuses on power amplifiers, a key but often overlooked part of the connection process, as these items allow for a more robust link between devices and networks, something that will become even more important as the IoT revolution takes hold. As you can see in the chart below from the Skyworks site, these amplifiers are a part of several of the biggest areas of the IoT world, including automotive and mobile devices: And as an investment, this company has seen a nice run for its earnings estimates as of late, including several increases to earnings expectations and not a single decrease. The consensus estimate has moved up for the full year and next year time frame, albeit by a small amount. Still, SWKS has a great track record in earnings season and it can be counted on to deliver at its quarterly reports. Skyworks has only missed once in the last three years at earnings season, helping in part to earn the stock a Zacks Rank #2 (Buy) in the process (at time of writing). 6
Skyworks has impressive fundamentals beyond its earnings picture, as the company has a great VGM score which includes Value and Growth ratings above B. In particular, the company excels when it comes to margins over 27% for net margins while its ROE is at a similar level too. This level of profitability when combined with double digit EPS growth projections makes it a solid choice for growth investors, but the value metrics are pretty good too. The PE for this stock is below 20, while it has a reasonable PEG right around 1.00. Clearly, investors are not overpaying for the growth potential in Skyworks stock, making it worth a closer look for IoT exposure. Cypress Semiconductor (CY) CY s role in the IoT world comes thanks to its WICED technology. This approach, which stands for Wireless Internet Connectivity for Embedded Devices, looks to increase the ease of connection between wireless devices and make the IoT cloud market more easily integrated too. You can see how this can help people in the IoT world in the picture below from the Cypress Semiconductor site: The stock has some impressive stats too, as the company currently has a VGM Score of B, including a top grade for growth. Projected EPS growth is north of 120%, while current cash flow growth is testing the 300% mark, so clearly the company is on an amazing growth trajectory. 7
CY has also been seeing rising earnings estimates as of late, including not a single estimate lower in the past sixty days for the current year or next year time frames. And with the consensus estimate moving higher for the full year and next year time frames in the past two months, it shouldn t be surprising to note this is a company with a top 20% industry rank and a Zacks Rank #2 (Buy) as well. Sierra Wireless (SWIR) Sierra specializes in machine-to-machine transmissions, allowing devices to talk to each other over cellular networks. This ability is a key part of certain aspects of the Internet of Things process, and the company s site even bills itself as building the Internet of Things so you know they are a prime candidate to benefit from the industry s growth. You can see some of the key industries they are in via this chart from their website below: 8
But the stock could also be a potential pick for some value investors, thanks to its low debt to equity ratio, as well as a PEG ratio that is in-line with the industry average. Growth is the real story here though, as Sierra has an ROE higher than the industry average, while it has current cash flow growth that is nearly ten times greater than the industry average. The company has seen a great estimate trend over the past two months, including a string of increases from covering analysts, further adding to their impressive story. This has had a dramatic impact on the full year consensus for Sierra, including a boost of over 60% for the current year. These revisions have carried the stock to Strong Buy territory, while its promising sector and industry ranks make it a very well-rounded stock for investors right now. Silicon Labs (SLAB) For another type of semiconductor play on this market, investors might want to also take a look at SLAB, an Austin-based company specializing in items like wireless system on a chip (SoCs) solutions, and microcontrollers. The company is especially proficient at shrinking key components, a critical area of the IoT revolution as devices proliferate to more objects in the future. And SLAB is definitely on the right path thanks to its traditional strengths, making it a potentially big player in the burgeoning IoT market, according to their latest research. 9
In terms of its fundamentals, it is hard to overlook Silicon Lab s strength from a sector and industry perspective. Semiconductors have been extremely hot thanks to the growing demand for the product, and SLAB finds itself in a top 10% ranked industry as a result. Earnings estimates have also been on the rise for this stock, and it has been next to impossible to find an analyst in our consensus who is lowering their estimate for the current year time frame. Add in a great earnings history which includes a lack of misses since 2014, and it is easy to see why this buy-ranked stock is another great way to tap the IoT trend. Rockwell Automation (ROK) Rockwell specializes in the industrial side of the economy, both in its software, and control products and solutions divisions. Given that industrial applications for Internet of Things devices are expected to rival if not exceed consumer applications, this could be a company to watch for a different slice of exposure as the Internet of Things saga unfolds. And this is really just a story in its early stages, as a recent survey by the MPI Group suggests that most in the industrial world are still in the dark for IoT, making for a potentially huge opportunity. 10
And as you might guess, Rockwell has some pretty outstanding growth statistics. The company s projected EPS growth easily exceeds the industry it is in, while the same can be said for the company s projected sales growth too. And with an ROE approaching 40%, it shouldn t be surprising to note that ROK receives a high Growth Score Grade as well. Earnings estimates have also been moving in the right direction as of late, including a noticeable increase to the full year and next year consensus estimates in the past two months. And with a nice streak of beats in earnings season, which includes an unblemished record since late 2015, this highly ranked stock could be more of an industrial choice for investors seeking an Internet of Things play at this time. Global X Internet of Things Thematic ETF (SNSR) If you want to play this market from a broad ETF perspective, then SNSR is really the only game in town right now. This fund holds securities in the semiconductor market, integrated products, the industrial internet, and then various smart or connected products too. Sure, investors could go for a semiconductor ETF, but this fund is laser-focused on companies across the investable spectrum both in the semiconductor world and outside of it that stand to benefit from the Internet of Things revolution. Currently, the ETF holds just under 50 stocks in its basket with a global focus. In fact, U.S. stocks make up about 60% of the total, so there is definitely an international flavor here. Investors should also note that the fund has a small and mid cap bias, as large caps account for just 30% of the total in SNSR. 11
The fund is relatively new, so volume levels are a little low and limit orders are advised. However, if the Internet of Things market takes off like we are expecting it to, this ETF looks to be a prime beneficiary, and one that could develop a sizable asset base too. Still, with such low volume levels, bid/ask spreads and limit orders may be something for investors to keep in mind for this ETF, at least in its early stages. Bottom Line The world of technology can be a volatile and quickly changing market. But sometimes, the potential of an up-and-coming industry is just too big to ignore. That is the case for the Internet of Things this year. The market segment is one of the quickest growing corners of the tech world, and it is just starting to hit its stride. So, if the world of the Internet of Things isn t on your radar yet, put it along with the selections above-- on your shortlist right now, as it could be an ideal growth segment for investors to focus on in 2017. 12