The Rise of the Talking (and Thinking) Machines: IoT Investing and Trends to Consider

If you’re Gen X or older, you may remember watching fun-yet-improbable scenes on sci-fi TV shows where people talk to machines, ordinary things like light bulbs and toasters communicate with each other, and a house or office space is a centralized hub of devices that can think, talk, and (to some extent) move. What started off as sci-fi has now become an emerging industry called the internet of things, or IoT.

What is IoT? What are the different elements of this trend? And—if you want to get a head start in investing in IoT and future machine masters—which industrial components might you want to look at now?

When Your Coffee Maker, Light Switch, and Toy Robot Talk to Each Other

IoT describes a network of physical objects and gadgets that can sense movements around them and communicate with each other. It’s basically what happens when the devices in your home can relay commands and share data to monitor or control aspects of their immediate environment.

For IoT to work, the objects—or “things”—need to be connected to the internet first. Additionally, the objects need the right software, sensors, and other components to track, monitor, and exchange data.

IoT may still be in its infancy, yet 22 billion IoT devices were in use globally by the end of 2018, from smartphones to household appliances, according to Statista. It’s estimated that by 2030 that number may skyrocket to around 50 billion.

You’ve probably heard people talking to or yelling at the Amazon (AMZN) Alexa, Google (GOOGL) Smart Home devices, Newell Brands’ (NWL) Mr. Coffee smart coffee maker, or Sphero’s Star Wars BB-8 robot. These are all IoT devices. But it’s just the beginning of a trend that’s likely to establish itself on much stronger footing.

Michael Kealy, education coach at TD Ameritrade, believes that with so many up-and-coming technologies in the IoT space, lots of companies could benefit from this trend. “For many consumers, an early experience with IoT may have been an app-controlled thermostat,” Kealy said. And IoT extends beyond the home. “Companies like Honeywell (HON) are designing ‘smart’ heating and cooling systems for corporate workplaces that are more efficient and have better ventilation; Gentex (GNTX) manufactures ‘smart’ vehicle rearview mirrors and windows with automatic dimming capabilities, which could hold promise for use in aircraft,” he added. 

What to Look for in Internet of Things Devices

As things become more computerized, many companies will likely make a digital transformation. From a very broad perspective, IoT involves data flowing from users to computers and vice versa. Basically, there are at least five things an IoT device needs:

• Sensor capabilities to collect data from its environment
• Internet connectivity to transmit and share the data it collects
• Messaging capabilities to send data to servers or other IoT machines nearby
• Data processing capabilities to analyze the data
• User interface for devices or appliances to send users emails or other messages

Those are the capabilities. What about the general components needed to make your machines sing and come alive? And what kind of companies make them? That can get a little messy because they’re all over the board, scattered across different industries and sectors. If you had to categorize them, they’d fall under:

• Cloud computing networks with ample data processing power to analyze and manage all IoT data
• Software designed specifically for IoT devices
• Hardware like semiconductors, sensors, and others that support IoT
• Smart consumer products like appliances, security cameras, and various devices (smartphones, trackers, etc.)

Might IoT be a potentially favorable investment theme? Recently, the pandemic might’ve impacted supply and demand for IoT solutions. Most electronic devices and gadgets remained unscathed during the pandemic. Some saw increased demand in the midst of business lockdowns, job losses, and general economic uncertainty. IoT provided that “something extra” for consumers that made life more enjoyable. “You can calibrate your speakers to achieve a surround-sound effect, connect to a smart TV, and monitor your home, all through an app,” Kealy mentioned.

Looking at the long-term horizon, it’s hard not to see how IoT is likely to define the future.

Things to Consider When Investing in IoT

Global spending on IoT solutions is expected to reach upward of $1.6 trillion by 2025 from last year’s $248 billion, according to Statista. That’s a 545% growth in spending.

If you look at the various tech components, you may notice that companies developing IoT tech range from “pure play” outfits to companies with diversified business segments, particularly in software, semiconductors, hardware, and consumer appliances.

If you’re considering investing in companies that develop IoT software or hardware, you have to do a little bit of homework. 

One more thing: Although robotics, artificial intelligence (AI), and cybersecurity tech may not be considered part and parcel of “IoT proper,” they may play a significant role in time. Robotics may become a physical-space extension of IoT’s digital space capabilities. Think about an AI and IoT combination. That could yield massive calculative and decision-making power—it’s what may cause IoT capabilities to increase multifold. And cybersecurity is a no-brainer: Anything with a digital door to the internet invites intrusion—human or machine—and needs protection.

The Bottom Line of IoT Investing

Here are two ways to look at investing in IoT:

• Although IoT is still an emerging industry, it’s one that offers potentially unusual growth, meaning opportunity.
• Let’s reverse that, too: Although IoT offers potentially tremendous growth, it’s still an emerging industry, meaning unusual risk.

There are pure plays, or companies dedicated mostly to developing IoT tech, and there are diversified plays, companies that have a wider suite of products and tend to develop IoT tech among their various business segments. And there’s an even more diversified approach—namely, investing in internet of things ETFs that hold a basket of both.

Investing in “the future” is difficult because, well, humans are particularly bad at predicting. Could a machine do a better job? Try asking one in your house.