Investing in the Internet of Things: A Beginner's Guide

The internet is more than a collection of websites and blogs you can visit through a computer, tablet, or smartphone. It's also the digital fabric linking those sites together, making it possible for anyone nearly anywhere to access them.

The Internet of Things (IoT) takes that idea to a different place. It's not a collection of websites, but millions of devices connected to the internet for the purpose of collecting data, tracking usage, monitoring functionality, and automating systems and processes.

An IoT-connected smart doorbell may send you a text message when somebody approaches your door, while an IoT-connected thermostat controls the temperature in your house. Your IoT watch can monitor your health, and an IoT refrigerator might be able to do everything from telling you that your milk has spoiled to ordering more when you run low.

A smartphone can control many smart-home devices. Image source: Getty Images.

What is a smart device?

Nearly anything can be an IoT device if it's properly equipped, and the range of functions for so-called "smart" devices can vary greatly. Smart devices are those that can understand simple commands or execute some level of programming.

A smartphone is an advanced example of a smart device. Your Apple (AAPL -4.04%) iPhone or Alphabet's (GOOGL -1.35%) (GOOG -1.30%) Google Android-powered handset is much closer to a computer than, for example, the limited functionality of a "smart" light fixture that can order its own replacement bulbs.

By loose definition, any device with an internet connection that does something -- like collect data and relay it to a central online repository, for instance -- is a "smart" device. If your oven can turn itself off after you send it a command over the internet, it's a smart device. The same goes for the perhaps billions (exact numbers are hard to pin down) of other connected devices.

The IoT is about connected devices. Image source: Getty Images.

How big is the Internet of Things?

By 2020, it's estimated there will be 20 billion IoT devices. Spending on the IoT has risen steadily. In 2009, IoT accounted for about $18 billion in sales; in 2017, that number grew to $1.1 trillion, and spending is expected to hit $1.71 trillion by 2019.

This is clearly an expanding area with lots of opportunities for investors. Consumers have embraced IoT devices like Amazon's (AMZN -1.20%) Echo voice assistant/speaker powered by Alexa artificial intelligence (AI). This is a sophisticated device that could, in theory, serve as a hub for a fully connected home.

You could, if you wanted to, use Alexa -- or smart speakers -- to control your lights, appliances, home security, and access to your home. What's not known -- and it's a big wild card for predicting the future of the IoT -- is exactly what people will use it for. Some, of course, are already using it as a smart-home hub, while others use it as a voice-powered way to ask about the weather or play a song.

While the full extent of applications remain to be seen, what's clear is that consumers are buying these devices. More than a quarter of all consumers own a smart-home device, according to a Coldwell Banker study reported on by CNBC in 2016. That number has certainly increased since then. 

Digital assistants are one way of controlling smart-home devices. Image source: Getty Images.

What's a smart home?

Essentially, a smart home is one filled with network-connected devices -- a home in which IoT devices allow the automation of functions that once had to be controlled manually. That could be as simple as unlocking a door remotely or turning on some lights. It also can become much more complicated with smart versions of pretty much every home appliance available.

You may control everything via a smartphone, laptop, or computer, or through a device like Amazon's Echo, Alphabet's Google Home, or Apple's HomePod. But it's likely that smart homes will be controlled by a combination of an in-home hub (like the three mentioned previously) and a smartphone or computer-based interface.

More and more, everyday appliances are becoming connected smart devices. Consumers can now buy a stove that can be programmed to pre-heat at a certain time. You also can get a smart toilet that adjusts the temperature while offering a customization set of "personal washes." Really, any device has smart potential, with smart vacuums and trash cans already on the market. 

What are the investment opportunities for the IoT?

The IoT works behind the scenes in countless areas. Connected devices range from relatively simple tasks like a light socket that can alert its owners when a replacement bulb is needed to a high-tech medical device that can order its own repairs.

In theory, there's very little that connected devices can't do. IoT-enabled sensors can monitor traffic in a city and adjust traffic lights accordingly. They also could be used in airplanes to report maintenance concerns or send in orders for beverage-cart replenishment before the plane lands.

The IoT allows pretty much anything to be monitored or automated. That allows for the creation of smart cities or smaller-scale applications like your watch being able to tell you it's time to stand up.

The IoT is a subset of the broader technology market segment. Still, within the IoT category, there are a number of different market segments where you can invest.

Consumer electronics

This list touches on many of the larger technology companies, as well as some brands you may not think of. These include Apple, Amazon, Microsoft (MSFT -0.41%), Google, and pretty much every other company making technology devices that are either directly or indirectly used or needed for IoT products.

This is the category that has the most familiar entries in it. Most people have been exposed to an Alexa-powered device or at least seen a TV commercial for one or something similar. For investors, this area might be the easiest to understand because it's very forward-facing and the potential to build from a device sale to other type of revenue models (subscriptions, smart-home devices, ordering groceries, etc.) is very high.

In addition, a company like General Electric and many lesser-known companies selling devices, appliances, and more that are equipped with IoT technology are IoT companies, even if that's not how you first think of them.

Healthcare

The IoT impacts healthcare in a number of ways. Companies like Apple are using data gathered from its IoT smartwatches to aggregate healthcare info to work toward solutions that benefit the public. Wearables allow for both broad data aggregation and very personalized tracking of everything from how often you move to heart rate and sleeping patterns.

IoT-powered devices also can work on a broader level. IBM's (IBM 1.20%) Watson -- the company's AI platform -- powers a slew of health-related services. This includes everything from allowing for more precise cancer treatments to using data to target alternate uses for drugs and helping government better manage healthcare programs.

Infrastructure

In theory, in the future, a smart car will be able to communicate with the city it's in to determine where to go. This allows for traffic management, prevents accidents, and could solve transportation problems. It also provides a tremendous amount of actionable data. For instance, as The Motley Fool's Leo Sun wrote:

In Barcelona, a citywide Wi-Fi network connects smart water technologies, automated street lights, remote-controlled irrigation for parks, on-demand garbage pickup, digital bus routes, and smart parking meters. These services significantly reduced traffic jams, pollution, and the overall usage of water and electricity.

In that same article, Sun noted how Cisco Systems expects smart cities to be a major source of growth. The company, he wrote, "launched a $1 billion program for smart cities last November."

Agriculture

Many of the same ideas that apply to cities can be applied to farms. "The precision farming market was valued at $4.42 Billion in 2017 and is projected to reach $9.53 Billion by 2023," according to a Markets and Markets report.

Precision farming increases yields by using IoT-connected sensors to track things like rainfall, temperature variances and soil conditions. Ideally, this technology could make growing food cheaper, allowing for better margins and lower prices.

Smart cars

Smart cars are being worked on by a broad range of manufacturers and technology companies. The definition can even include Google's Waymo's efforts to deliver self-driving vehicles to the various companies that have embedded voice-controlled digital assistants into their entertainment systems.

Smart-car technology also can include IoT-equipped vehicles that tell you when they need to be serviced. In some cases, a smart car might be able to diagnose its own repairs and make sure the part it needs is waiting when you drive it (or it drives you) to the service station.

Top IoT Stocks

Data from yahoo.com as of 6-27-2018

The biggest challenge when investing in the IoT is that it's an ill-defined broad space where the major players all have diverse income streams. None of the companies on the list below is an IoT pure play. That means that the companies that are creating IoT devices, software, and hardware operate in other markets and make the majority of their revenue from these other sales channels. Broadly, this list falls into technology companies embracing the connected future or brands operating primarily in tangential areas that see the IoT as a way to grow their businesses.

Microsoft

One of the largest supporters of the IoT, Microsoft, wants to make Windows the dominant operating system (OS) in the space. The company offers complete solutions with an IoT platform spanning the cloud, OS, and devices. At the core of that sits the company's Windows 10 IoT core -- a simplified version of its OS for connected devices.

In addition to offering its own IoT solutions, Microsoft has thrown open its products to developers. It has a platform -- similar to what it offers for its regular Windows suite of products -- that has tools for developers to create IoT services, devices, and solutions. The company also recently decided to commit an added $5 billion to its IoT efforts, which Microsoft Azure Vice President Julia White explained in a blog post:

We're planning to dedicate even more resources to research and innovation in IoT and what is ultimately evolving to be the new intelligent edge...We are uniquely positioned to simplify the IoT journey so any customer -- regardless of size, technical expertise, budget, industry or other factors -- can create trusted, connected solutions that improve business and customer experiences, as well as the daily lives of people all over the world.

IBM

Big Blue has built its IoT business around its Watson artificial intelligence. One of the more famous users of AI, Watson has taken on chess masters, appeared on Jeopardy, and more quietly has served as the AI brain for countless projects.

IBM's Watson IoT platform is designed to be an enterprise solution, a way for IBM's technology to help other companies develop products and solutions. This has led to projects across multiple industries including automotive, retail, manufacturing, and utilities. Watson-based solutions also have been used to help companies manage assets, inventory, and facilities. IBM offers a developer's platform to encourage third parties to create new uses for the Watson AI.

Amazon

Amazon has been a subtle leader in bringing IoT technology into consumers' homes. For example, its Amazon Dash buttons are an example of an IoT connected device. Consumers simply push the button and it orders the product that it's linked with (as shown by a graphic on the device). A consumer might place a Dash button for K-cups near his or her coffee maker or one for dishwashing detergent under the sink near the dishwasher. It's IoT at its most simple, but it's a strong example of how the technology can enter people's homes.

The online leader also is one of the major players in the connected-homes market. Its Echo devices, powered by its Alexa AI, have the ability to serve as a digital-home hub and can control IoT-connected devices.

In addition, Amazon has an IoT platform offered through its Web Services division. This is a set of tools similar to what IBM and Microsoft offer companies and developers to enable them to create their own uses for the technology or implement the software and solutions Amazon has created.

"AWS IoT Core is a platform that enables you to connect devices to AWS Services and other devices, secure data and interactions, process and act upon device data, and enables applications to interact with devices even when they are offline," the company explained on its IoT Web page.

Apple

Apple is competing with Amazon (and others) to be the leader in connected homes, mostly using the iPhone as a controller in the way that Amazon uses its Echo devices. The company also has its HomePod digital assistant/smart-home hub, but low sales make that less a piece of its strategy than its successful smartphone.

In addition to being in people's homes, Apple also has entered the consumer IoT market through its watches and the data it collects through iPhone services like Apple Health. These smart devices monitor things like steps taken, heart rate, and more, allowing Apple to offer actionable advice if the user is looking for that.

Apple, of course, also makes its IoT version of its IoS operating system available to developers through its HomeKit service. The company has targeted app developers, device makers, and even hobbyists with HomeKit, giving them the tools to create connected products and services. On a commercial level, Apple also partners with companies across segments including automotive, retail, and manufacturing to create IoS-based IoT products and services.

Alphabet

In some ways, Alphabet's Google has been the laggard brand behind IBM, Microsoft, and Amazon, which all offer cloud-based services designed to help companies analyze data from a network of IoT-connected equipment. That began to change in February when the company hired former Samsung CTO Injong Rhee to lead its IoT business. His early goal, according to a blog post, was to align Alphabet's various projects related to the IoT ranging from its self-driving cars, its Google Home virtual assistant, and its cloud-based services efforts, Reuters reported.

"One of the first things I would like to do with my Google colleagues is to get these efforts coordinated and aligned toward a concerted IoT story of Google -- in the process, create distinct consumer and enterprise product lines," Rhee wrote in his post, according to the Reuters story.

Alphabet broke out its cloud revenue for the first time in its fourth-quarter earnings report. CEO Sundar Pichai noted that Google Cloud was "already a $1 billion-per-quarter business" and that its G Suite group of cloud productivity and collaboration tools has more than 4 million paying customers. That's well below its key rivals, including Amazon, which reported cloud revenues of over $17 billion in 2017. 

Google, of course, also has its Home family of products. These are IoT speakers and smart assistants very much like Amazon's Echo devices.

Intel

The chipmaker actually does a pretty good job of laying out its IoT vision on its website. Intel (INTC -0.25%) breaks down its IoT strategy into three segments:

1. Connect the unconnected. "That means taking current unconnected devices and adding sensors and technology that allows them to transfer data to the cloud, where it can be analyzed and transformed into actionable insight," according to the company.

2. Build smart and connected things: This means that new devices the company or its partners create should have connectivity built in from the start.

3. Create an autonomous world: Intel is designing devices that will become smart enough to function on their own. That means they will make real-time decisions after learning from their environment and using data to improve performance.

Like many of the other players on this list, Intel has both its own products and works with partners who buy its processors and chips. That puts the company in a good position to grow its IoT revenues as the category grows.

ARM

Another chipmaker, ARM (ARMH), which is fully owned by Japan's SoftBank, has its own cloud IoT platform, Mbed. The service is powered by the company's own Mbed OS. Like the other companies on this list, ARM is attempting to offer IoT solutions, as well as tools for its partners to create what they need. 

"Mbed Cloud device management solution provides flexible, secure, and efficient IoT management capabilities for a range of device profiles, and can be deployed as a cloud solution, as an on-premises solution with cloud-like capabilities without dependency to any public cloud, or as a hybrid solution," the company explained on its website.

Arm also recently partnered with NVIDIA in a deal that will make it easier for chipmakers to add deep learning abilities to next-gen consumer electronics, mobile devices, and IoT gadgets. Arm and Nvidia will integrate the open-source NVIDIA Deep Learning Accelerator architecture into Arm's Project Trillium machine learning chip designs. This should -- according to the companies -- enable IoT chipmakers to quickly integrate AI features into their products.

AT&T/Verizon/T-Mobile/Sprint

All four of the major wireless carriers own wireless spectrum that can be used to carry information from connected devices to the cloud. In fact, it's that spectrum and using it to meet future demands that's a major part of the argument T-Mobile is making as to why it should be allowed to acquire Sprint. Spectrum is what the wireless carriers use to transmit data across the country.

All four of these companies are working on plans to build next-generation 5G networks. While that faster technology may not be needed for a smart toaster to let you know your toast is done, the creation of 5G networks will open up capacity by taking the highest-end traffic, like video playback, off of other parts of the carriers' networks.

The wireless carriers are sort of the passive winners in the IoT space in addition to their active efforts to advance the smart city concept. Their services are needed to carry information from connected devices to the cloud, and as long as they can effectively monetize those service needs, they should profit from the IoT's growth.

IoT is not one thing

What's clear is that the IoT has only just begun, and some of its uses haven't even been imagined yet. Connected devices enabled with machine learning can unlock data and patterns that humans would struggle to see. For example, driverless smart cars may help us set work schedules based on minimizing traffic, and connected refrigerators may tell us why we're not losing weight (or why we are).

It's an open-ended set of possibilities that's starting relatively small. Having a smart light bulb in your house that shuts off when nobody's in the room, or buying a car that can preemptively tell you it needs maintenance, are only early-stage uses for the IoT.