One day, everything and everyone, will be ‘connected’. Smart watches already ‘talk’ to mobile phones and laptops; cars hooked up to the internet collect and share data with the outside world; intelligent energy and water meters monitor and calculate our usage in real-time. How long before a passenger jumbo jet determines a better route midair, lands itself and refuels without a human in sight?
The Internet of Things – the physical devices that exchange data with each other over a wired or wireless network – offers breathtaking possibilities and worrying potential pitfalls in equal measure. The opportunities to enhance and save lives, improve industrial processes and even contribute to greater sustainability are enormous. So too are the risks: today’s car thief could be stealing an identity as well as a set of keys and wheels. Hack a connected aeroplane and lives are automatically endangered.
The commercial opportunities are none too shoddy, either. The global market for the Internet of Things – essentially, revenues created through connected objects and their data – was valued at just under $600bn last year, according to Fortune Business Insights. That will expand from an anticipated $714.5bn this year to more than $4 trillion by 2032, representing a compound annual growth rate of 24.3%, the research firm and consultancy predicts. The development of blockchain technology, effectively a powerful and safer system for information sharing, as well as the rise of smart cities, is expected to help fuel the market’s expansion.
For investors, there are literally thousands of companies that can offer exposure to the growth of the Internet of Things, both direct and indirect, from tech firms and hardware manufacturers to security specialists and software suppliers.
‘Lots of connected devices means lots of semiconductor content,’ said Tom Hancock, an elite investor who is head of the focused equity team and a partner at GMO. ‘That’s particularly relevant for analog-focused companies that bridge the gap between the physical and digital world that happens at “the edge” with Internet of Things devices.’
Hancock said that his team’s biggest related holding is AAA-rated Elite Company Texas Instruments (US:TXN), a US-based maker of analog semiconductors, which provide a bridge between the material and digital worlds. He said that the company is ‘getting ahead of the curve and building out the capacity to support the demand we expect to come down the road’.
How Citywire Elite Companies works
With our look at some of the Elite Companies that channel into the trends around the Internet of Things, we’ll be taking in a semiconductor company, but also an IT and infrastructure group, the world’s largest internet retailer, a social media giant and a cybersecurity specialist.
Remember Rambus
Andrew Hadland, director of research and a portfolio manager at Mesirow Equity Management pointed out that the development of the Internet of Things is not central to the investment case for AAA-rated Rambus Inc (US:RMBS). However, the company is a clear beneficiary of its growth and has also developed products, in security in particular, intended to capitalise on its adoption.
Rambus, founded in 1990 by two Stanford University professors, makes microchips with very high memory power and the capacity to move and transfer data. Its chips are often found in the servers used in data centres, which have surged in popularity on the back of the growth of both AI and the Internet of Things.
‘AI servers require orders of magnitude greater compute and memory capacity, up to six times, than industry-standard servers,’ Hadland said.
Thanks to a 2016 acqusition, Rambus is the market leader in what is called a registered clock driver, which is part of every server memory module
‘Additionally, the server processor industry is going through an upgrade cycle that requires moving to a DRAM [dynamic random access memory] technology called DDR5 from DDR4,’ Hadland said.
This is driving significant growth for the company, whose RCD technology is also benefiting from the explosion of AI. ‘Regardless of who wins, Rambus will supply all of them with their memory products and IP [internet protocol],’ Hadland said. ‘As the result of some dislocation in the market following an acquisition, Rambus has also gone from having a 20% to 25% share of the DDR4 market to a greater than 40% share of DDR5.’
Top three Elite backers
| Elite manager | Fund | Size in fund (%) | Rank in fund |
|---|---|---|---|
| David G Swank and Brian P Smoluch | Hood River Small-Cap Growth | 3.6 | 2/91 |
| Mitchell S Brivic and Michael C Coyne | Voya Small Cap Growth | 1.5 | 14/95 |
| Kathryn A Vorisek and Leo Harmon | Mesirow Small Company | 1.4 | 19/79 |
Sources: Citywire / Morningstar, latest holdings data.
Hadland’s colleagues at Mesirow, elite managers Kathryn A Vorisek and Leo Harmon, are among the eight top investors who own shares in Rambus – they hold them in the Mesirow Small Company fund. Hadland said that Rambus also has an opportunity as companies try to move more functions, temperature sensing and power management, for example, on to groups of memory chips.
Rambus’s sales, profits and margins have grown rapidly and are forecast to power ahead over the next three years. The excitement has helped the shares deliver a near seven-fold total return over the past five years.
| Market capitalisation | $6.53bn | Price | $60.53 |
|---|---|---|---|
| 52-week high/low | $76.38 / $43.19 | Return on capital employed | 9.7% |
| F’cst price to earnings | 28.3 | F’cst dividend yield | – |
| F’cst EPS growth | 46.5% | 12 mth share price | 35.3% |
Source: FactSet. EPS = earnings per share. Forecasts based on next 12 months.
Go-to Cisco
Cisco Systems (US:CSCO) is again not a straight bet on the Internet of Things, although it has made a no-nonsense target of the market.
The AAA-rated group, established in 1984 by two computer scientists – also based at Stanford University – makes networking hardware and software and other IT and data infrastructure products, including in cybersecurity and the cloud. In practice, that could mean anything from a domestic internet router to a server for an industrial-sized data centre.
With the Internet of Things, Cisco wants to offer everything, particularly when it comes to commerce, or what’s often referred to as Industrial IoT, with networks, data management and cybersecurity all in the mix.
Its customers range from manufacturers introducing automation and connected devices in the workplace to local authorities trying to manage traffic systems or keep public spaces secure. Europe’s busiest port, in Rotterdam, the Netherlands, for example, uses Cisco products to help manage the movement of vessels and handling of cargoes.
With a market value approaching $200bn, Cisco is one of the bigger beasts of the tech sector – it’s 30 times larger than Rambus, for instance.
The shares are popular among elite investors, some 26 of whom are holders; several, in fact, bought in more than a decade ago, since when the shares have more than trebled.
Top three Elite backers
| Elite manager | Fund | Size in fund (%) | Rank in fund |
|---|---|---|---|
| Christopher Brightman and Robert Arnott | Pimco RAE US | 3.8 | 4/124 |
| Rafael Resendes and Paul Blinn | Applied Finance Select | 3.1 | 3/50 |
| James Warwick and Devin Armstrong | Invesco Comstock Select | 3.1 | 18/30 |
Sources: Citywire / Morningstar, latest holdings data.
John C Bailer, deputy head of equity income at Newton Investment Management, is an elite investor who owns shares in several funds, including the BNY Mellon Income Stock fund. He said: ‘Cisco continues to position its offerings around more thematic growth drivers including AI and cybersecurity. For example, the company is partnering with Nvidia to bring new AI solutions to its enterprise customers and will also drive new offerings from Acacia around the data centre market where demanding AI applications will require higher speed optical solutions.
‘The company also continues to pivot further into high-revenue software categories. Moving deeper into the software market will be complemented by the company’s acquisition of Splunk. This acquisition will complement Cisco’s existing cyber security portfolio. Finally, Cisco trades below intrinsic value with an attractive dividend yield of over 3%.’
| Market capitalisation | $201bn | Price | $49.55 |
|---|---|---|---|
| 52-week high/low | $58.19 / $45.56 | Return on capital employed | 30.9% |
| F’cst price to earnings | 13.2 | F’cst dividend yield | 3.2% |
| F’cst EPS growth | -0.3% | 12 mth share price | -2.7% |
Source: FactSet. EPS = earnings per share. Forecasts based on next 12 months.
All about Amazon
Having started life as an online bookstore in Jeff Bezos’s garage in 1994, Amazon (US:AMZN) has grown to become one of the world’s most pervasive, and valuable, companies. And the AAA-rated group has done so by giving consumers the opportunity to buy virtually anything, from anywhere, and have it delivered to their doorstep, in most cases in less than 24 hours. Convenience and cost effectiveness have been key.
With the Internet of Things, Amazon is threatening, or promising, to be as ever-present. Consumers across the world have bought comfortably more than 500 million of its AI-powered intelligent devices featuring the distinctive voice of ‘Alexa’ since the first Echo went on sale a decade ago. Alexa – and the things it offers from streamed music and information apps to grocery shopping – represents the most public face of modern connected life for consumers.
For commerce, there is Amazon Web Services, which connects devices and operates cloud-based services. AWS is a rapidly growing part of Amazon that last year generated sales of $90.8bn, equivalent to just under 16% of the group’s total sales of nearly $575bn. It is by far the most profitable of the group’s activities, however, turning in an operating profit of $24.6bn, representing exactly two-thirds of the group’s total for the year of $36.9bn.
Amazon’s shares are owned by 24 of the world’s best-performing investors, a couple of whom have been holders for more than a decade. The majority, though, took their positions in the past four years.
Top three Elite backers
| Elite manager | Fund | Size in fund (%) | Rank in fund |
|---|---|---|---|
| Peter Rutter, Will Kenney and James Clarke | Royal London Global Equity Sel Fd (Irl) | 5.5 | 2/42 |
| Paul P Meehan and Thomas Meehan | Meehan Focus | 5.1 | 6/26 |
| Lee Freeman-Shor | Quilter Investors Glbl Uncons | 4.7 | 3/42 |
Sources: Citywire / Morningstar, latest holdings data.
One of those tech-driven businesses that is regularly decried as overvalued and poised for a fall, Amazon’s shares have consistently outpaced the S&P 500 for more than 25 years, and despite the company’s size have delivered an 11-fold return the past decade with a total return of exactly 1,000%.
| Market capitalisation | $1,851bn | Price | $178 |
|---|---|---|---|
| 52-week high/low | $181 / $96 | Return on capital employed | 11.4% |
| F’cst price to earnings | 40.2 | F’cst dividend yield | – |
| F’cst EPS growth | 39.4% | 12 mth share price | 82.3% |
Source: FactSet. EPS = earnings per share. Forecasts based on next 12 months.
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Managing Meta
When Mark Zuckerberg changed the corporate branding of Facebook to Meta Platforms (US:META), the social media group’s sharp young founder was making a bold call about the future of technology and the digital world. He was, of course, also having to contend with a spiralling share price and a sharp deterioration in Facebook’s reputation amid a backlash against fake news and online hate speech.
Roughly two and a half years later, the metaverse – an all-singing all-dancing immersive 3D virtual world – remains a work in progress, but AAA-rated Meta’s sales, profits and share price are all firmly on song. So on song, in fact, that the company has started to pay a dividend for the first time and has seen its earning forecast hiked over the past 12 months.
Founded as TheFacebook in 2004, Meta owns a family of social media apps – Facebook, WhatsApp and Instagram among them. It also operates what it calls Reality Labs, a set of heavily loss-making investments in augmented, mixed and virtual reality, mainly involving headsets and software. The vast majority of its revenues come from advertising.
Yet in many ways Meta Platforms can be seen as a direct bet on a pure version of the Internet of Things: what started with Facebook as an endeavour to connect people to each other has morphed into Meta and the move to connect people to things. If it takes off, the metaverse as a fully functioning digital society could be capable of generating the same sorts of revenues as the physical world, with shops, businesses and entertainment and so on. It’s a big gamble, but a potentially lucrative one.
Top three Elite backers
| Elite manager | Fund | Size in fund (%) | Rank in fund |
|---|---|---|---|
| Craig Inman, Daniel Kane and Thomas A. Renolds IV | Artison US Value Equity | 5.3 | 1/32 |
| Robert Arnott and Christopher Brightman | Pimco RAE US | 4.6 | 2/124 |
| Anthony Hene, Tom Hancock and Ty Cobb | GMO Quality Select Investment | 3.5 | 5/37 |
Sources: Citywire / Morningstar, latest holdings data.
Meta shares are owned by 32 elite investors, the majority of whom first bought in way before the rebranding and when Facebook was a far less valuable company. Over 10 years the shares have returned 656%.
| Market capitalisation | $1,112bn | Price | $506 |
|---|---|---|---|
| 52-week high/low | $524 / $198 | Return on capital employed | 29.2% |
| F’cst price to earnings | 24.4 | F’cst dividend yield | 0.4% |
| F’cst EPS growth | 29.5% | 12 mth share price | 155.6% |
Source: FactSet. EPS = earnings per share. Forecasts based on next 12 months.
Crowdstrike action
CrowdStrike (US:CRWD) is the only one of the five companies we’re looking at here not to boast a top Elite Companies rating. The AA-rated group, founded in 2011 and listed on Nasdaq in 2019, is a specialist in cybersecurity, in particular for the data that is processed and stored in the cloud. To that extent, it is therefore a direct play on the worrisome risk with the Internet of Things that connected devices get hacked.
Last year, the company released what it claimed was the first and only detection and protection software of its kind that is aimed at the ‘extended’ Internet of Things – which covers every aspect of connected devices, including in industry and healthcare. It also has the CrowdStrike Falcon platform, which incorporates generative AI and represents, it says, its best system yet.
Four elite investors own shares in CrowdStrike, but they are all high-conviction holders who bought in last year and topped up their funds again in December.
Top three Elite backers
| Elite manager | Fund | Size in fund (%) | Rank in fund |
|---|---|---|---|
| Daniel J Mahr, John Paul Lewicke, Damien Zhang and Frederick Konopka | Federated Hermes MDT Mid Cap Growth | 3.6 | 1/125 |
| Damien Zhang, Frederick Konopka, Daniel J Mahr and John Paul Lewicke | Federated Hermes MDT Large Cap Growth | 1.2 | 19/100 |
| Frederick Konopka, Damien Zhang, Daniel J Mahr and John Paul Lewicke | Federated Hermes MDT All Cap Core | 1.1 | 25/173 |
Sources: Citywire / Morningstar, latest holdings data.
In the relatively brief time that the company has been on the stock market, the shares have been volatile but have returned 417% overall. And if the analysts are to be believed, sales, profits and cashflows are set to skyrocket over the next five years.
CrowdStrike recorded a tidy net profit of $89.3m last year against a loss of more than double that amount during the previous period. According to consensus forecasts, net profits are expected to approach $2.9bn in the year to January 2029.
| Market capitalisation | $75.0bn | Price | $327 |
|---|---|---|---|
| 52-week high/low | $365 / $116 | Return on capital employed | 0.4% |
| F’cst price to earnings | 80.6 | F’cst dividend yield | – |
| F’cst EPS growth | 26.6% | 12 mth share price | 146.2% |
Source: FactSet. EPS = earnings per share. Forecasts based on next 12 months.
