Editor’s Note: This article is a part of our “If You Only Buy One Stock” series where we look at 2021’s most popular investing trends and have our top financial journalists make their very best pick. Click here to see more names for your must-buy list.
If you’ve ever used a Nest thermostat, or asked Alexa to check the weather, then you have embraced the world of IoT (Internet of Things). IoT is basically a smart network—a way to connect internet-enabled devices with each other so they can make decisions and act upon them.
With tens of billions of “things” connected, from home appliances and vending machines to livestock and factory machines, the IoT ecosystem is a computing behemoth that feeds on itself every second of every minute of every hour of every day.
The IoT not only becomes bigger with each new touchpoint, it also brings people — and machines — closer. Given this is expected to be a $1.6 trillion market by 2025, investors won’t want to miss out.
Ripple Effect Investing
A quick Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) search of “Top IoT” stocks will point you to some of the most obvious winners.
These companies mostly focus on the connectivity piece of the IoT network — whether we’re talking about early tech innovators like CalAMP (NASDAQ:CAMP), or more industry-specific players like Dexcom (NASDAQ:DXCM) and Alarm.com (NASDAQ:ALRM) in medical and security systems. There are also more diversified ways to play the theme, like buying into enterprise networking and chip giants like Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC), or even the Global X IoT Index (NASDAQ:SNSR) exchange-traded fund.
The connectivity piece of IoT is a big, big market — but a lot of players are going after it, and valuations look stretched. ALRM, for example, trades just 14% from its all-time high. Investors looking to get into this space can still jump in though, by thinking about it another way. The secret: invest in the “ripple effect” of IoT technology.
Because you know who else loves IoT? Hackers.
The bigger and more connected the ecosystem, the more breachable it is. Consider that everyone in your workplace has a PC, a phone and a bunch of other digital devices. All of these connect at some point or another to your corporate network. Those same devices are also being used on home networks and public WiFI networks. That means every time you connect onto the network, whether it’s from home, from work, or while sipping your soy latte at Starbucks (NASDAQ:SBUX), you have opened up a path for a hacker to steal the digital crown jewels.
And now we’re connecting more “lowly” devices like thermostats to the same network as more sensitive information. That makes it easy for the bad guys. Case in point: hackers were able to break into a casino database by tapping into a smart thermostat in the lobby fish tank.
If You Could Buy Only One: SPLK Stock
EVERY device connected to an IoT network needs to be smart in order to be secure. And that’s why, if you could buy one IoT stock, the stock to buy is Splunk (NASDAQ:SPLK). This software company — which got its name from spelunking, or the exploration of caves — mines for information within corporate networks in real-time.
Splunk’s focus is on real-time data analytics. The company’s technology helps customers improve computer network performance and provides insights into security and compliance. Now, the company is setting its sights on industrial IoT. Splunk’s software collects, analyzes and visualizes real-time and historical machine data from any source. This includes computing devices, control systems, sensors, or anything else connected by industrial networks.
Given the company’s software and cloud focus, Splunk’s business model has several appealing characteristics. Growth investors will appreciate strong recurring revenue (up 40% year-over year), expanding operating margins (13% in the most recent quarter), and a mix shift toward higher-margin products.
Valuation is also reasonable, with SPLK stock having pulled back over 30% from its summer highs. Finally, with cloud giants Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) integrating more analytics and security features into their services, a specialized company like Splunk could also make an attractive acquisition target.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.