The market for connected devices has been around for a lot longer than most people think. You’ve probably had one such device around for your whole life — a telephone.
But with the emergence of megatrends like mobile, cloud and big data, there has been a major transformation. Connected devices are becoming ubiquitous, appearing throughout our homes, cars, hospitals and factories. Essentially, any device can be tethered with sensors, WiFi or cellular systems.
So how can investors capitalize on this? Well, the good news is that there are many companies that are pushing innovation in this market — and should be long-term winners.
Here’s a look at five that stand out:
Connected Devices Stocks: ForeScout Technologies (FSCT)
While there are many benefits to connected devices, there are also some downsides. Perhaps the biggest is the threat of hacks.
This is where a company like ForeScout Technologies (NASDAQ:FSCT) comes in.
Yes, it’s a cybersecurity operator that focuses on managing the risks of connected devices in an organizations networks. But to do this, FSCT takes a much different approach. Note that during the past decade the company has developed so-called agentless technology that discovers intrusions in real-time. The system also can handle complex environments, such as wired/wireless networks and virtual/cloud infrastructures.
As a testament to the technology, the U.S. Department of Defense recently awarded the company with an enterprise-wide blanket purchase agreement.
In terms of the growth, it has certainly been robust for FSCT. In the latest quarter, revenues jumped by 42% to $59.7 million and operating cash flows came to a hefty $24.5 million, up 41%.
Connected Devices Stocks: NXP Semiconductors (NXPI)
NXP Semiconductors (NASDAQ:NXPI) has gone through quite a bit of drama lately. Of course, Qualcomm (NASDAQ:QCOM) dropped its acquisition of the company because it could not get approval with Chinese authorities.
The result is that NXPI stock has taken a hit, going from $125.50 in February to $95. But then again, this does look like a good opportunity to pick up shares in a company that is likely to benefit from the trend of connected devices.
Note that the company develops a broad array of chips, such as for power management, security, digital processing and mixed signal solutions for RF (radio frequency). All these have proven quite effective for autos, mobile phones and consumer applications. For example, the company has the No. 1 positions in bank card identification, auto safety and mobile NFC (which is for payments).
While the failed QCOM acquisition was a distraction, it is important to keep in mind that NXPI got a $2 billion break-up fee. Besides, QCOM’s interest was a big-time validation of NXPI’s technology.
Something else to consider: NXPI stock is fairly cheap, at 12.5X. The company also recently announced a $5 billion buyback.
Connected Devices Stocks: SAP (SAP)
SAP (NYSE:SAP), which was founded in the early 1970.s, is one of largest players in the enterprise application market. At the core of the company is its ERP (Enterprise Resource Planning) system, which handles critical areas like HR, inventory and financials. Consider that the customer base is more than 404,000 and there are over 150 million users of its cloud applications.
But the market is fairly mature. So to find growth, SAP has been investing in other markets like databases. There have also been a spate of acquisitions, such as for Ariba, Concur, Sybase, Business Objects and SuccessFactors.
Now with this massive platform, SAP has been building out its IoT (Internet of Things) business as well — which is essentially another way of describing connected devices. Part of this has been retooling the existing technology. But SAP has also introduced is own standalone system, called Leonardo.
These initiatives are in the early stages — but they are quickly gaining traction. A notable example of this is Cisco (NASDAQ:CSCO). By using Leonard, the company has been able to identify a whopping $1 billion in new business opportunities.
Connected Devices Stocks: Alarm.com (ALRM)
In a sense, the home and business security industry is an early example of connected devices. But next-generation technologies have definitely been supercharging things.
One of the standouts in the category is Alarm.com (NASDAQ:ALRM), which has created a platform for intelligently connected properties. Some of the functions include video monitoring, energy management and intelligent automation. Last year, Alarm.com’s system processed more than 100 billion data points from over 80 million connected devices.
Growth has also been solid. In the latest quarter, revenues rose by 25% to $92.8 million and adjusted EBITDA came to $23 million, up from $14.1 million on a year-over-year basis.
However, ALRM is really more focused on the higher-end of the market — that is, the company uses more advanced systems and cameras. There is also a network of 7,000 service providers.
And besides, the market opportunity is massive. According to Gartner, the spending on connected homes — on a global basis — is expected to go from $45 billion in 2017 to $146 billion by 2021.
Connected Devices Stocks: DexCom (DXCM)
When it comes to connected devices, there is significant opportunity in the healthcare industry. Real-time monitoring can certainly be a key driver in improving the outcomes for patients.
Just look at DexCom (NASDAQ:DXCM), which is the pioneer of continuous glucose monitors that do not require finger sticks for calibration. For example, its G5 Mobile system is seamlessly connected to a person’s iPhone, iPad or Android device. There is also a cloud platform that provides reporting and personalized advice.
Diabetes is definitely a terrible problem across the globe. According to the The International Diabetes Federation, there are over 425 million people with the disease. It’s actually the seventh leading cause of death in the U.S.
Now as for DXCM, the company has been able to continue to innovate and get approvals from the FDA. The growth has also been strong. In the most recent quarter, revenues grew by 30% to $184.4 million and GAAP net income was $24.2 million.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.