Not content with being the world’s premier designer for smartphone microchips, ARM Holdings (LSE: ARM) is now trying to dominate the microchip market for the Internet of Things (IoT).
And with figures suggesting that the IoT market could be worth $7.1tn by 2020, it certainly makes sense for ARM to try and establish a foothold in this rapidly expanding market.
To do this, ARM is increasing its dominance over the IoT market by broadening its product offering through acquisitions and R&D. During the first half of the year, ARM acquired Offspark, a Dutch firm that specialised in security software for the IoT market, Wicentric, a Bluetooth® Smart stack and profile provider, and Sunrise Micro Devices (SMD), a provider of sub-one volt Bluetooth radio intellectual property (IP).
ARM plans to merge Wicentric and Sunrise to form what it has called the ARM® Cordio™ portfolio. ARM claims that the devices it will be able to develop using the technology from its Cordio portfolio will be able to transmit data for up to 60% longer than existing products between battery charges.
This initiative and plan to capture a share of the IoT market makes ARM one of the three tech stocks every investor should own.
ARM currently trades at a forward P/E of 32, which may put some investors off. However, ARM’s earnings per share are set to jump 68% this year — it could be worth paying a premium for this kind of growth.
Top pick
Telit Communications (LSE: TCM) has become the company of choice for investors looking to profit from the rise of the IoT market. As ARM is trying to benefit from the growth of the IoT market by developing small, high-power microchips, Telit sells hardware that lets everything from vending machines to rental cars transmit data wirelessly.
And over the past four years Telit’s shares have surged by more than 550% as investors have clamoured to get in on the action.
Telit isn’t your standard hardware company. The group is trying to boost profit margins by expanding into the lucrative business of collecting and analysing data sent by IoT devices. This should give Telit an edge over its peers like ARM, which concentrate on the hardware market.
City analysts expect Telit’s earnings per share to expand 12% this year, followed by growth of 44% during 2016. Based on these forecasts, Telit is currently trading at a forward P/E of 20.9, falling to 14.9 for 2016.
Telit’s revenues for the nine months ended 30 September 2015 were $236.1m, representing year-on-year revenue growth of 15.1%.
A return to profit
This year, Imagination Technologies (LSE: IMG) is expected to return to profit for the first time in two years. According to the City, the company is set to report earnings per share of 4.9p on a pre-tax profit fo £16.9m for the year. Also, the City believes that Imagination’s growth will continue on into 2017. Analysts have pencilled in earnings per share growth of 48% to 7.3p next year.
Nevertheless, just like ARM, Imagination is trading a premium multiple of 44.1 times forward earnings, which may be too rich for some investors.
Lack of income
Imagination, ARM and Telit may all have bright prospects but one thing they don’t offer is income. ARM’s dividend yield is a meagre 0.7% and the other two don’t offer a dividend at all.
