By now, hardly anyone would call the Internet of Things (IoT) new.
But with an increasing number of devices gaining connectivity abilities, you certainly can’t call this trend dead, either.
On the contrary…
IHS Markit expects the IoT market to grow fourfold to 75.4 billion devices in 2025.
Research firm MarketsAndMarkets forecasts that the global IoT market will be worth $661.7 billion by 2021.
Most investors in the IoT space are on the hunt for a technology company that’s crafting the world’s next game-changing device.
But you don’t need to isolate a single winner. There’s a way to cash in no matter who cracks the code.
Senior analyst Jonathan Rodriguez takes a closer look at an overlooked opportunity for tech investors.
The Pick and Shovel Can Be Mightier Than the Sword
It’s no secret that the way of the future is connected devices.
But if you can believe it, the biggest gainers of this trend might not be the device-makers themselves.
The supply chain is perhaps the most overlooked piece of the tech profit puzzle.
I’m talking about the companies that build the parts that make up these connected devices. In other words, the pick-and-shovel plays.
I know, these firms aren’t as sexy as the ones making the sleek gadgets on the shelves. But these component-makers can deliver fatter gains.
And as devices proliferate, so will the need for components.
For example, Cirrus Logic Inc. makes the integrated circuits that facilitate the playback of audio in iPhones.
The iPhone 7 features stereo sound and more Cirrus components than ever before. And since the device’s release, Cirrus has outperformed Apple Inc. in a big way.
In the last two years, Cirrus shares have brutally beaten Apple — gaining 83%, versus a gain of 6% for the iPhone creator.
And while Apple is Cirrus’ largest customer, Cirrus also counts Apple competitor Samsung Electronics Co. Ltd. among its chief clients.
But here’s an even juicier supply chain play…
Connect Yourself to These Profits
Kemet Corp. (KEM) is an American electronic components manufacturer.
Based in Simpsonville, South Carolina, the company has specialized in the construction of high-end capacitors for nearly 30 years.
In case you’re unfamiliar, a capacitor is a passive electronic component that stores energy.
Capacitors play a huge part in storing data and can be found on nearly every circuit board inside a computing device.
Kemet supplies capacitors to a range of different industries, such as automotive, communications, aerospace and alternative energy.
The company’s clients include some of the biggest electronics manufacturers in the world: Cisco Systems Inc., HP Inc. and IBM.
Similar to Cirrus Logic, Kemet has eggs in multiple baskets.
And the company’s balance sheet reveals even more room for growth…
The Gains in the Machine
The company sports a growth-friendly market cap of $371.6 million.
Following a major restructuring, which included deep cost-cutting initiatives, investors have piled into the stock.
In the last year, shares have gained 473% and blasted to a 52-week high. Kemet’s performance bests the rise of the small-cap Russell 2000 index by more than 11 times.
That’s not surprising, though, considering that the company posted remarkable earnings growth of 133% in the last year.
In fact, the company has bested analyst EPS estimates in five of the last eight quarters.
And over the last five years, Kemet has grown earnings by 30.4%, versus a mere 7.5% rise in the industry average.
Since 2014, revenue is down 12%. But gross margins have increased by 53% over the same period.
The company has also boosted cash from operations by 33% in the last year.
Add it all up and there could be much more upside on the horizon for this supply chain gem.
Bottom line: Investors may not need to invest in the “next big thing” for big tech gains. Tech suppliers can offer even greater — and more diversified — profit potential.
On the hunt,
Senior Analyst, Wall Street Daily