How to invest in the Internet of Things, without the hype

The buzz around the internet of things is finally producing results for investors. it’s just the start

 
Audi smartwatch
Automaker Audo unveiled its own smartwatch at CES in January. (David Paul Morris/Bloomberg/Getty)

Hype. Investors are suckers for it, especially when technology is involved. If you heard any of the buzz emanating from this year’s Consumer Electronics Show in Las Vegas, for instance, you’ll know it’s all about the Internet of Things, or IoT, where everything from toothbrushes to cars are connected. But is it the next mega-trend or just hype?

According to Goldman Sachs, it’s the former. In an exhaustive new report, the investment firm describes IoT as a US$7-trillion opportunity. Within five years, the authors note, 28 billion “things” are expected to be connected to the Internet, up from nine billion in 2013. (Consider that only three billion actual computers currently access the web.) As the cost of sensors and the bandwidth needed to connect devices drops, more products will hit the market.

Goldman lists several segments that stand to benefit, led by industrials and home automation. The industrial sector alone could account for one-third of the IoT market, with companies like Schneider Electric (EPA: SU), which specializes in energy management systems, leading the way. The investment case for smart homes is likewise focused on efficiencies. A connected dwelling could lower consumers’ energy costs by 40%. Goldman expects security systems to become another growth niche. As it stands, only a small fraction of U.S. homes boast any automated features.

Not everyone’s convinced, though. Richard Tse, a technology analyst at Cormark Securities, wants to see more developments before getting excited about IoT. There have been few real leaps in this space, he says, with one exception: cars. “That’s definitely a real phenomenon,” he says. Globally, regulations coming into effect will require cars to be wired for safety, he says. BlackBerry (TSX: BB) is developing connected car systems, though the enterprise is still a small contributor to the firm’s bottom line.

That’s Tse’s biggest issue with investing in IoT: It’s still on the periphery for most participants. “The challenge with the marketplace is there are no pure-play companies in this space,” he says. Sierra Wireless (TSX: SW) probably comes the closest. The Richmond, B.C., company makes machine-to-machine systems for original equipment manufacturers and has been the best performing tech company on the Toronto Stock Exchange for two years running.

While the Goldman report concedes these are still early days, its case for investing in IoT is that the key obstacles to mass adoption are gone. In just the past year, four separate automakers signed on to AT&T’s (NYSE: T) connected car service, which enables vehicles to act as Wi-Fi hot spots. General Motors (NYSE: GM) has made the service available in 30 of its 2015 models.

Investors also need to look beyond the tech space. Insurers, for instance, are already offering discounts to drivers who agree to be monitored. The companies get a better-informed way to set premiums, and that should lower the volatility of their margins. (Here, Goldman says, investors should avoid holding companies that are slow to adapt.) Service and communication providers like AT&T, Cisco (Nasdaq: CSCO) and Qualcomm (Nasdaq: QCOM)—all responsible for maintaining the networks and chip sets that make IoT possible—should benefit too.

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