Opportunities in the Internet of Things

 
I’m taking a break from broad market discussions this week (other than to say that both large caps and small caps are up since last Thursday) to talk more specifically about a big trend that we’re building exposure to in Cabot Small-Cap Confidential. This is the Internet of Things (IoT), also referred to as the Internet of Everything (IoE). We’re basically talking about connected technologies here, which can be discussed in so many contexts that we really have to narrow our focus to have a meaningful conversation.

Gartner recently came out with updated estimates for the IoT market’s growth, stating that it sees 4.9 billion connected devices in 2015 (+28.8%) growing to 6.4 billion in 2016 (+30.4%) growing to 20.8 billion in 2020 (implying an average annual growth rate of 34.3%). In other words, it sees accelerating growth. Consumers are expected to drive growth in connected devices (things like home appliances, light bulbs, etc.), while enterprises are expected to drive the majority of spending (on things like subscription software solutions).

One of the best ways to gain investment exposure is with subscription software vendors. I like these companies (as you know) because their revenue tends to be stickier than companies that are just selling hardware; it’s a lot easier for a consumer to forgo a new hardware device than it is for a company to pass on renewing a subscription to a software platform that it has become dependent on. I’m not saying I don’t like IoT hardware plays, but that it’s important to differentiate between the two angles.

Forrester also put out a report talking about the acceleration in digital businesses, and highlighted the financial services industry as one that’s been slow to adapt to changing customer perceptions and desires. That makes sense; people aren’t as quick to change how they bank as they are to change how they listen to music! One of the things the report highlighted was an expected pickup in application programming interface (API) adoption, especially open APIs, as financial services firms seek to acquire new customers, and retain the ones they have.

Let’s assume Gartner and Forrester know what they’re talking about (they usually do), and take a small step to connect the dots (OK, I had this planned all along, but still). One of our stocks is clearly a pure-play on API solutions, and two are in many ways financial services firms. These three software vendors all have exposure to the aforementioned trends, and while the market research doesn’t guarantee the stocks will surge, it does provide more evidence that we’re getting into some high potential stocks here.

Bottom line: the IoT market is growing at a good clip, and subscription software vendors that have some exposure, even if it’s somewhat tangential, are good ways to play the potential.

Tyler Laundon is Chief Analyst of Cabot Small-Cap Confidential. To read subscriber reviews of Cabot Small-Cap Confidential, click here.

This is an excerpt from Cabot Small-Cap Confidential, which features little-known stocks with big potential. It offers a limited number of subscribers the opportunity to discover overlooked, low-priced stocks that have the potential to skyrocket. This advisory is best suited to experienced investors who embrace volatility.


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