Depending on your point of view, the Internet of Things represents either the next great leap forward in the connected age … or the beginning of Skynet. Happily, in either case, investment opportunities should abound.
The Internet of Things describes the migration of internet connectivity from computers, tablets and smartphones to pretty much any thing you can think of. From thermostats to toasters to parking meters, estimates have it that in fewer than five years, billions upon billions of the most prosaic, everyday devices will be connected to the internet.
Goldman Sachs (GS), for one, is especially bullish on the Internet of Things as a thematic investing idea. Given the explosive growth forecast for the whole Internet of Things thing, it’s easy to see why.
As Goldman Sachs wrote in a recent note to clients:
“While the fixed Internet connected 1 billion users via PCs, and the mobile Internet connected 2 billion users via smartphones (on its way to 6 billion), the [Internet of Things] is expected to connect 28 billion ‘things’ to the Internet by 2020.”
That’s a lot of things. Indeed, the Internet of Things is so big, Goldman Sachs breaks it down into five separate areas of development worth watching:
- Connected wearable devices
- Connected cars
- Connected homes
- Connected cities
- The industrial internet
Yup, the Internet of Things represents a vast expansion in interconnectivity. What that means for society is anyone’s guess. What it means for your portfolio is no less murky.
The Internet of Things and the Risks of Thematic Investing
Naturally, a megatrend such as the Internet of Things must offer tremendous opportunities for companies capable of developing and maintaining the technology required to get your refrigerator online. And that’s where Goldman Sachs starts naming names.
Goldman Sachs issued a list of 17 companies that are “best positioned” to benefit from the coming megatrend of the Internet of Things. As a service to our readers, we’ve culled the bank’s list down to stocks trading on a major U.S. exchange with a Goldman Sachs rating of “buy”:
- ARM Holdings (ARMH)
- Cisco Systems (CSCO)
- Freescale Semiconductor (FSL)
- InvenSense (INVN)
- Maxim Integrated Products (MXIM)
- Qualcomm (QCOM)
- Ruckus Wireless (RKUS)
- Silver Spring Networks (SSNI)
- TE Connectivity (TEL)
Now for the bringdown.
As exciting as the emergence of the Internet of Things might be, investors should proceed with caution. As Goldman Sachs notes, the Internet of Things escalates security concerns to almost unthinkable levels, making everything from your car to your vital signs susceptible hackers.
It’s also not like regulators, public interest groups and privacy advocates are going to look the other way.
But the most important thing for investors to remember is that thematic investing of this sort is surprising risky. Indeed, it’s the deceptive simplicity of thematic investing that hides much of its risk.
After all, the original rise of the internet — the dot-com boom — was one of the great thematic investing opportunities of all time. We all know how that turned out.
Investing is hard because you have to pick winners.
The problem is that thematic investing sounds like carnival barkers shouting, “Everyone’s a winner.”
And that’s a good way to lose
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
