Investing in a new technology is never easy. This is especially true for what is now called the Internet of Things (IoT). I started writing about the IoT almost 15 years ago before the term was invented. I called these “always on” technologies because they would work in the background, without human interference.
I foresaw home automation applications like Ring.com, home inventory applications like the Amazon.com, Inc. (NASDAQ:AMZN) Echo Dot and medical applications such as those offered by Fitbit Inc (NYSE:FIT). Billions of low-power sensors, connected without wires, would collect necessary data on your life, while server software analyzing it and your world would operate automatically.
I underestimated it. I didn’t foresee the cloud, either. I didn’t see how much more quickly it would be adopted by industry than consumers, because automation reduces waste and a big customer can define its own standards. I ignored the security and privacy implications, which have kept the consumer market from developing.
But I had a lot right. Moore’s Law keeps improving the Internet of Things in many ways. Radios are getting better, faster and they are using less power. And it’s only getting started. The Boston Consulting Group believes this will be a $267 billion market in 2020. The companies that will “win” for investors will not necessarily be those making the loudest plays, or even the companies listed here. You’re looking for growth, and the bigger a company’s base of revenue, the less quickly IoT revenue will impact their overall growth rate.
There are also different ways to play the game, through the machines running IoT software to the software that defines what they do. Always check the news for alliances, mergers, and new products that will, I guarantee, upset vendor apple carts. Change, and failure, is the cost of living on the bleeding edge.
Internet of Things Stocks to Buy: General Electric (GE)
No big company has bet more on the Internet of Things than General Electric Company (NYSE:GE). No big company has lost more on its early bet. Former CEO Jeff Immelt believed that services based on IoT technology would help GE dominate its industrial and healthcare markets. Sensors and networks would make jet engines, power systems, windmills and even hospital equipment capable of calling in for repair before they broke down, making factories, power systems and healthcare more resilient.
That’s what the company is still selling today. Much of it is based on GE’s Predix, a cloud-based operating system written with VMware, now a unit of Dell, specifically for IoT applications. GE has been signing alliances with large software vendors like Oracle Corporation (NASDAQ:ORCL) . It also bought Meridium, a machine analytics firm and ServiceMax, a field service company, hoping to find and fix problems before they became disruptive to its customers. None of this has yet helped the stock, which is down 22% this year.
Predix is getting much of the blame. The company is now reducing expectations for the unit, and is even willing to sell equity in the Predix unit to build alliances. Instead of building its own data centers, Predix will now run in Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) clouds. An investor’s hope for a comeback in GE stock must be based, not just on Predix getting its act together, but on Predix helping sell GE’s line of industrial, power and healthcare gear.
Even if Predix hits its new revenue targets, it will represent just 10% of current revenue three years from now. Even while GE stock has been falling, however, analysts aren’t giving up on it, as eight of 19 still have it on their “buy” lists, and only two saying “sell.” Do they know something? This is what makes GE the best play on the IoT board. It has been beaten down, and if the opportunity is there it should start flying again under Flannery’s mix of cost controls and willingness to make deals.
Internet of Things Stocks to Buy: SAP SE (SAP)
A recent IoT gallery at ComputerWorld listed SAP SE (ADR) (NYSE:SAP) as the most powerful IoT company in the world. The call is based on SAP’s HANA Enterprise Resource Planning suite. Databases will be at the heart of managing the IoT — billions of things can’t be managed any other way. SAP calls its Leonardo a “digital innovation system,” a way to combine all the elements of modern technology from the cloud to blockchain to machine learning in one grand concert. In this new world, data is the new gold.
SAP stock had been pacing rival Oracle until June when the stock just stopped dead in the water. That is not down to analysts changing their views. Most still say you should buy the stock. But the past two-quarters have seen lower net income, even while revenues continue to grow at 10% year-over-year.
SAP is a German company run by an American, Bill McDermott. Its bets on the Internet of Things aren’t its only play for investors. The company is big in workforce planning, in finance, in social media and in forecasting, among other things.
Rather than building its own clouds and software standards for IoT, SAP has partnered with BASF SE (OTCMKTS:BASFY), another German company, to collect data on industrial software from OEMs and service providers, then store it in a single database. This should limit its exposure to the software costs in IoT integration while adding partners for future sales efforts.
As GE proves, it can be as costly to get into a market too-early as too-late. SAP hopes its moderate pace will make it right on time.
Internet of Things Stocks to Buy: Symantec (SYMC)
Symantec Corporation (NASDAQ:SYMC) stock has been on the comeback trail since May 2016, when it briefly fell below $17 per share. These days it’s hovering near $30. The fall in the stock was down to a breakeven year even while revenues were rising 10%. Its reputation for financial management was also hurt by the sale of Veritas for less than it was acquired for.
The bad 2016 was a follow-up to a worse 2014, which saw Symantec fired CEO Steve Bennett and eventually replace him with Gregory Clark, who came with the acquisition of Blue Coat for $4.65 billion, half the price of the Veritas sale. Clark brought a more industrial and cloud-based focus to the company, and the Blue Coat deal represented a turning point for the stock.
Readers may think of Symantec as being primarily a PC security company, but these days it’s more focused on the cloud, lumping PCs in with sensors and phones as “endpoints.” This is reflected in its recent acquisitions. Fireglass handles endpoint security through a centralized system, while Skycure offers security for mobile devices.
Symantec is betting that it will be a long-term winner by putting security into IoT devices by default. This can include adding such features as code signing and encryption to devices with very little memory or processing capability. Its solution is called Roots of Trust, with minimal software added to the device and complex functions routed through the network. Symantec is helping build an Open Trust Protocol, a secure architecture and code management system for connected devices.
The speed with which security vendors like Symantec can protect the IoT will help determine just how fast the IoT revolution proceeds. Executives both young and old believe an IoT security breach is just around the corner, and this is slowing uptake of the technology. You might say that companies like Symantec saw a cold coming on, and equipment suppliers like GE wound up in the hospital.
Internet of Things Stocks to Buy: Cisco Systems (CSCO)
Chips, sensors, software and security are all big markets for the Internet of Things, but the biggest opportunity may lie in the network itself. This is the belief of network equipment vendor Cisco Systems, Inc. (NASDAQ:CSCO).
But as with GE, the promise has yet to materialize, and the stock has had a rocky ride. It has gained just 6.5% this year, buoyed by a decision to raise the dividend from 26 cents per share to 29 cents, giving it a yield of 3.6%. But the stock still sells at a below-market price-earnings multiple of 17. If you’re looking for an IoT bargain, here it is. The 29 analysts following the shares are mostly buyers, however. Cisco sees the volume of Internet traffic growing three-fold over the next five years, and vice president of strategic innovation Maciej Kranz has written a best-selling book on IoT, Building the Internet of Things.
Kranz sees the market’s current growth as driven by business-use cases, not the consumer space, and Cisco has 14,000 IoT customers in a wide variety of industries. He says the old tech adage that companies must reinvent themselves every 3-7 years to survive, is now breaking into the general market, thanks to the Internet of Things. Manufacturing is the biggest growth market.
The company’s latest play is the Cisco IoT Operations platform, dubbed Cisco Kinetic, running on the Microsoft Azure cloud, announced in May. Right now, Cisco admits, only about one-quarter of IoT projects are being deemed successful by the managers who ordered them. This hit-or-miss software problem is holding back the entire industry, Cisco included.
There are successes generating huge savings, but every application carries a risk of failure, mainly a problem with software tools. Industry leaders are all trying to change this, but many of those making the biggest bets, like GE and Cisco, have taken the biggest hits. If you believe that’s about to change, these stocks are some of the best bargains on the tech landscape.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.