These Will be the Big Winners of Ultra-Fast Wireless
In the beginning, there was a Coca Cola machine. The time was the early 1980s, the place was Carnegie Mellon University in Pittsburgh.
Here’s what happened, as chronicled by DATAVERSITY, a provider of data management resources for information technology professionals:
“Local programmers would connect by Internet to the refrigerated appliance, and check to see if there was a drink available, and if it was cold, before making the trip.”
Hence was born the Internet of Things (IoT), though it wouldn’t be officially so-called until 1999 and wouldn’t be a major “thing” for at least another decade or longer.
That time is now. At the start of this year, the number of devices connected to the internet totaled about 8 billion. By 2027, that number will grow by a factor of five, to more than 41 billion devices, according to an estimate by Business Insider. Greasing the skids is the rollout of 5G, the next generation of wireless network technology that, to use a technical term, is super-duper fast.
I sense some investment opportunities.
— Bob Bogda, Editor
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We are a nation of “cord cutters.”
We’ve been cancelling our cable and satellite TV contracts in droves, and many of us now consume our entertainment through streaming video services such as Netflix (NFLX) and Hulu. According to Variety, pay-TV households peaked ten years ago at 105 million. Today, the number is closer to 82.9 million, and eMarketer predicts the total will drop to 72.7 million by 2023.
Trouble is, most of us have only one high-speed internet option, and a lack of choice leads to high prices. The kind only a monopoly can charge.
Help is on the way. Wireless service providers have begun to roll out 5G services, which promise download speeds of up to 10 times greater than today’s 4G service. You’ll soon be able to download a two-hour movie in just seconds. Over the airwaves.
Who’da thunk?
Yet, the real game changer here is the impact that 5G will have on businesses. Super-fast wireless speed is opening the door to an era when just about any component can transmit data to the hive mind, from the factory floor, to connected cars plying the open road.
Welcome to the world of the Internet of Things (IoT). This new area of tech is a successor to a form of communications known as machine-to-machine Communications (M2M). The advent of 5G speeds opens up machines to a whole new world.
According to Transforma Insights, there were 7.6 billion active M2M devices in place at the end of last year. 5G should spur even greater deployment. Transforma says that 24.1 billion such devices will be in play in 2030, implying an 11% annual growth rate. By then, we’ll be looking at a $1.5 trillion market, with around a third of that spend going to hardware.
As you might imagine, semiconductor firms want in on this action. This past February, the U.K.’s Dialog Semiconductor bought Adesto Technologies for around $500 million, or $12.55 per share. That’s a 57% premium to Adesto’s value on the day before the deal was announced. Adesto is a small but fast-growing provider of a range of IoT chips.
Individual investors want in on this action, too. Here are two names to watch.
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Canada’s Sierra Wireless (SWIR), with around $600 million in annual sales, has already had a strong presence in the M2M field. Now, the firm is moving quickly to develop a line of IoT-focused chips and software. Sierra’s Octave platform has been updated to harness the power of 5G wireless. Clients use Octave to remotely control equipment from afar and generate reams of secure data, out on the edge of computer networks. Octave is also emerging as a key tool in the area of “predictive maintenance,” as IoT sensors can monitor the health and output of equipment, notifying a technician of a potential problem before it leads to equipment failure.
Look for Sierra Wireless’ profits move well higher as sales rebound. That’s because the firm is exiting low-margin businesses. A division focused on the auto industry, for example, was recently sold for $165 million.
To be sure, the pandemic has led this firm to post a slowdown, as sales will likely fall around 10% this year. That blunted growth momentum helps explain why shares now trade for less than half the levels seen back in 2017.
The share-price slump has pushed this stock deep into bargain territory. Analysts at Raymond James looked at the firm and its peers and noted an average value for these firms at around 1.8 times sales on an enterprise value basis. (Enterprise value equals market value plus debt minus cash). Sierra Wireless is valued at just 0.3 times sales. You rarely find a company that has both an ultra-cheap stock and a target market that looks quite so juicy.
Action to Take: Buy shares of Sierra Wireless under $16 and sell shares when they reach $24.
If you’re interested in taking a more broad-based approach, consider the Global X Internet of Things ETF (SNSR). This exchange-traded fund, with more than $200 million in assets and a 0.68% expense ratio, owns a range of companies such as security firm ADT (ADT), chip maker Skyworks Solutions (SKYW) and medical device firm Dexcom (DXCM).
This ETF has shown solid trading momentum in recent months (up about 70% since mid-March) as excitement builds toward the 5G-fueled Internet of Things.
Action to Take: Buy shares of Global X Internet of Things ETF under $32 and sell shares when they reach $48.
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