Our connection to the internet took on a new and more involved form when much of the connectivity moved from the PC to the smartphone. This ushered in a whole host of applications that changed the way we live.
And now, connectivity is changing form again with the Internet of Things (IoT). IoT takes device connectivity far beyond smartphone and tablets. With IoT, objects such as speakers, refrigerators and electrical meters now find themselves connected.
The existence of the small but powerful chips used to achieve this will enhance the productivity of people and businesses. It also creates a new line of business for companies in the semiconductor and telecom industries, as the Internet of Things is fueling higher demand for these chips.
It should also serve as a boon to the wireless industry, as such chips could create new sources of revenue.
Given this potential, it seems every tech hardware company is fighting for a presence in the Internet of Things. Many companies will grow as a result. Be careful, as valuations can greatly vary. However, these stocks should profit both themselves and their investors:
Cheap Internet of Things Stocks: Arrow Electronics (ARW)
Arrow Electronics (NYSE:ARW) specializes in the value-added distribution of components such as semiconductors, software and hardware related to data centers. The Centennial, Colorado-based tech company started out in the 1930s as a seller of radio parts. Today, Arrow manufactures IoT components for every step in the Internet of Things process. Arrow handles the creation, connectivity, management and maintenance of such components.
The marketplace responded well to this comprehensive IoT solution, taking revenue higher by over 10% both last year. Analysts expect that growth rate to continue this year. Profit growth has followed suit. Net income grew by almost 12% per year over the last five years. ARW stock expects growth to stay in the 10% per year range for the next five years as well.
Despite this high revenue and profit growth, the performance of ARW stock has lagged. For that reason, its growth comes at a very low price-to-earnings (P/E) ratio. Predicted 2018 earnings of $8.78 per share and a stock price of around $76 per share place the forward P/E at about 8.7. The stock’s average P/E over the last five years has stood at about 12.8. Hence, even if the stock remains well below the average S&P 500 P/E (currently around 25), the profit potential remains high.
Both its valuation and its market cap at around $6.6 billion should also attract investors and possibly buyout interest in the future. Given the factors working in its favor, ARW stock provides both an affordable and potentially lucrative segue into the Internet of Things business.
Cheap Internet of Things Stocks: Intel (INTC)
Having lost its long-held status as “world’s largest chipmaker,” Intel (NASDAQ:INTC) is looking to stage a comeback partially built on IoT. Long the dominant chipmaker in the PC era, Intel has switched its focus. With its history with PCs and more recent success in the data center market, Intel has firmly positioned itself to lead the way in the Internet of Things. They provide an end-to-end solution and have redesigned their chips to provide an IoT function. Combined with its data-center capabilities, Intel can also offer both security and analytics capabilities.
What makes this a better investment than other old-line tech peers in IoT such as Texas Instruments (NASDAQ:TXN) hinges on its valuation. Despite its comeback and move higher, INTC stock trades at only 13.6 times forward earnings. This low PE likely remains a legacy of the declining PC-market. Although Intel’s growth lagged during this time, the pivot towards data centers and the Internet of Things has revitalized it. Analysts project an average annual growth rate of around 10% per year over the next five years due to its new niches.
Also, its market cap stands at nearly $240 billion. With a return to growth, it holds enough cash to buy out many of its competitors. This should only boost profits going forward.
The sudden resignation of CEO Brian Krzanich creates some uncertainty. However, the falling stock price caused by this anxiety probably creates a buying opportunity.
With a low valuation and high potential to return to dominance, Internet of Things investors need to continue following INTC stock.
Cheap Internet of Things Stocks: Microchip Technology (MCHP)
Microchip Technology Inc. (NASDAQ:MCHP) manufactures microcontroller, memory, and analog chips. The Chandler, Arizona-based technology company was founded in 1987, with origins in the PC business. Its current era began in 2009, when it developed a chip that claimed to have the world’s lowest sleep current. It has since acquired several other semi companies. Today, it boasts a market of around $22 billion.
Like with many of its peers, the Internet of Things has driven MCHP’s growth to new highs. Over the last five years, annual profit growth has exceeded 20% per year. Although analysts expect growth to slow to an average of about 14% per year, IoT should continue driving MCHP stock higher. Wall Street also estimates a forward P/E of just over 12 at current prices.
Analysts predict this growth even though MCHP stock has doubled over the last two years. Historical patterns indicate the stock can keep growing. The P/E ratio has exceeded 30 at various times during the previous ten years. The continuation of good news could bring valuations back to past levels.
Due to the growth expected in IoT, Wall Street has every reason to expect this good news. With its lead in low-sleep current chips, MCHP should play a significant role in the Internet of Things revolution.
Cheap Internet of Things Stocks: Skyworks Solutions (SWKS)
Woburn, Massachusetts-based Skyworks Solutions (NASDAQ:SWKS) specializes in semiconductors for RF and mobile applications. It has leveraged this wireless technology into the Internet of Things, connecting a wide variety of consumer-oriented devices. It also helps companies connecting devices, and machines used in infrastructure, industrial and medical applications.
Many of these items have already become available on the consumer market. This has helped to drive massive amounts of growth.
SWKS stock saw profit growth in excess of 28% per year over the last five years. Analysts forecast a slowdown to just under 15% annual growth. Interestingly, the market has not priced in the growth rate of SWKS. It currently trades at about 12.5 times forward earnings. The average P/E over the last five years has come in at about 21.6. Therefore, the SWKS stock price would have to rise by over 40% to meet its average valuation.
Such a move would push SWKS stock through its resistance point. Since May 2015, it has moved into the $110s per share range only to fall back. However, profits continue to reach the point that the stock will either have to push through or remain at an absurdly low P/E ratio. The stock has not seen an average yearly P/E below 10 since 2008. Still, barring a financial crisis comparable to the one that occurred that year, I doubt SWKS stock would reach such a low level again.
The stock trades in the high $90’s per share range now. If it can break its past resistance levels, Skyworks can finally head towards the sky.
Cheap Internet of Things Stocks: Sierra Wireless, Inc. (SWIR)
Sierra Wireless (NASDAQ:SWIR) is a Canadian company that designs and manufactures wireless equipment. The Richmond, British Columbia-based company offers Internet of Things technology in a wide variety of applications.
At a market cap of $575 million, SWIR remains one of the smaller players in this space. Still, it makes up for a small size with its massive growth. The company enjoyed an average growth rate of about 27% per year over the last five years. Wall Street expects that growth rate will average about 19% per year over the next five years.
Despite this small size and massive growth potential, this stock trades at a cheap valuation. Analysts expect the company to earn 87 cents per share this year, down from $1.05 per share in 2017. This drop will probably become an anomaly as Wall Street expects to see earnings of $1.25 per share in 2019. This would bring the stock to a forward P/E of about 18.3.
SWIR stock has also seen a history of price spikes. The stock, which now trades in the $16 per share range, spiked to $48 in late 2014. Such spikes always occurred when the stock’s value more than doubled in just a few months. If such an occurrence repeats, perhaps that would make SWIR stock one to sell. However, given its IoT profit growth, I think investors can make money on SWIR even without trying to time the stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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