As the reach of wireless expands, the Internet of Things — or IoT — promises to become one of the more robust niches in tech over the next few years. As such, Internet of Things stocks should prosper along with the industry.
Semiconductor firms play an essential role in the growth of the IoT industry. However, due in large part to factors not related to IoT, many of the best semiconductor stocks have seen their values drop dramatically in recent months.
While this may put off some investors, many Internet of Things stocks now trade at valuations so low that they could become the best stocks in tech once a recovery begins. With low valuations, a potential for growth, and their critical roles in IoT, these four stocks appear well positioned to benefit investors:
AT&T (NYSE:T) stands in a uniquely strong position in the 5G market. Assuming T-Mobile (NASDAQ:TMUS) succeeds in acquiring Sprint (NYSE:S), Verizon (NYSE:VZ), AT&T, and T-Mobile will form a “Big Three” of wireless. Given the tens of billions in cost it takes to build a 5G, the market will likely not see new entrants. Hence, most IoT devices will eventually run on services provided by one of these firms.
I chose AT&T primarily because it maintains the lowest forward P/E ratio — 8.5 — and has the largest dividend yield — currently 6.6% — among the three.
To a degree, T stock has become cheap for a reason. Unlike its other major peers, it has taken on tens of billions in debt to acquire a sizeable media content library. Investor skepticism about this move likely explains the lower P/E ratio.
Admittedly, I do not know if this strategy will succeed. What I do know is that AT&T can sell the content library if that business line fails. Also, with the oligopoly forming in the nascent 5G industry, chances of failure in that niche are near zero. Hence, I feel okay with collecting a 6.7% dividend while waiting for this approach to play out. Once AT&T finds their path to success, the P/E ratio should catch up to that of its peers. Due primarily to its 5G network, AT&T should eventually become one of the more successful Internet of Things stocks.
NXP Semiconductor (NXPI)
NXP Semiconductor (NASDAQ:NXPI) takes its place among Internet of Things stocks on many levels. The firm’s work in chips for automotive, consumer, and industrial applications means IoT plays a critical role in the company’s products. Through IoT, it connects devices ranging from cars to health monitors to drones.
As a result, NXPI stock appears more immune to the chip glut that has hurt profit growth for many semiconductor companies. However, despite this immunity, the market has punished NXPI stock. It fell for most of 2018, losing over 35% of its value since hitting its all-time high in February. Granted, the failed takeover attempt by Qualcomm hurt the stock as well. However, with a forward P/E of 9.3, Wall Street values it as if it were being hit by the chip glut.
Analyst forecasts indicate otherwise. For 2019, they predict 19.7% profit growth. They think NXPI will see double-digit profit increases in 2020 as well. Moreover, as 5G networks launch in earnest in 2020, and self-driving cars take to the roads, IoT should take off exponentially. This should propel NXPI stock to more gains. With a market cap of just over $23 billion, its story has only just begun. Once the market notices the continued profit growth of NXPI, I doubt the P/E will remain in the single-digits for long.
In recent years, Qualcomm (NASDAQ:QCOM) seems better known for its failed attempt to take over NXP or its court battles with Apple (NASDAQ:AAPL). However, Qualcomm has led the way in connectivity for decades. This has helped to make QCOM one of the leading Internet of Things stocks.
Even without 5G, Qualcomm has already shipped over one billion IoT devices. The firm offers turnkey IoT solutions. Also, its latest 5G-compatible Snapdragon processor will further strengthen its IoT presence.
IoT could also lead a recovery in long-suffering QCOM stock. QCOM has lost one-third of its value since reaching a multi-year high in 2014.
Years of pain have taken its forward P/E to about 12.4. But analysts forecast a return of profit growth in fiscal 2020. They expect profit to increase by 15% that year. Forecasts also indicate double-digit earnings increase will continue after 2020.
Investors should also take QCOM seriously as a dividend stock. It has hiked its payout for eight straight years. The company will pay $2.48 per share this year, amounting to a yield of nearly 4.6%. Even if the stock languishes, stockholders earn a decent return while they wait for a recovery. Hence, with a low valuation and a recovery in profits forecast, QCOM could become one of the more lucrative IoT stocks.
Skyworks Solutions (SWKS)
At first glance, Skyworks Solutions (NASDAQ:SWKS) may not stand out from other Internet of Things stocks. Like most IoT players, SWKS specializes in chips designed for RF and mobile communications. Its IoT chips appear in smartphones, wearables, appliances, medical devices, and many other areas. SWKS also provides IoT in the world’s industrial and wireless infrastructure.
Despite decades of trading history, IoT has put SWKS stock on the map. It traded in the single-digits for years after the dot-com bubble burst. However, it had risen as much as 28-fold from its 2009 low before pulling back over the last year.
Like most of its peers, SWKS suffered as a chip shortage quickly became an oversupply situation. SWKS stock has fallen more than 40% from its 52-week high. Like other Internet of Things stocks, the decline appears overdone. Thanks to the dropoff, SWKS stock trades at just 9x forward earnings.
Profits also appear positioned to recover once the industry works off the glut in available chips. For fiscal 2020, Wall Street forecasts profit growth of 9.6%. They also believe those increases will reach the double-digits in future years. The move to 5G should ensure this growth continues. With few companies offering such a value proposition at so low of a P/E ratio, SWKS should see increased interest from investors in the near future.
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.