“An opportunity this good only comes along once twice in a lifetime.
“These 3 quick-action interviews with our Foolish investing experts (below) show how to prepare yourself for the $19 trillion revolution that’s swallowing up the Internet. And how to zero in on the 3 next-generation technology stocks that are best positioned to profit.
“I’m so convinced that I invested $15,000 of my own money on the spot!”
That’s how the latest ad for the Motley Fool Stock Advisor opens — it’s a pitch for the “Internet of Things” which they call the “Monster that Swallowed the Internet.” So not really so much the “internet disappears” as it is “the internet takes over all things,” and we’ve looked at a similar “R.I.P. Internet” pitch from them before … but this one’s pitching three companies (the first one teased just one), so let’s dig in and find out what they are.
The tease this time is not that you’ll earn 89X your money specifically, but that this next phase of the Internet might be 37X bigger than the internet as we currently understand it. The special report they’re flogging is called “How to make $19 Trillion disappear into your pocket” … so they’re certainly still tossing around some big, jaw-dropping numbers.
And as the Fool has been wont to do of late, they’ve gotten newbies to write their ad letters — whether that’s because these folks have compelling stories to tell, or just because they don’t want to soil the reputations of David and Tom Gardner by having them sign the over-the-top promotional hype.
So the letter’s actually signed by Aaron Winter, their “Director of New Member Outreach” … and it takes the form of a series of mini-interviews with Fool folks about what the Internet of Things is (basically, all things becoming connected — not just phones and computers and wearable technology stuff but almost everything you can imagine), and how successful the Gardner brothers have been with Stock Advisor over the years.
We’ll skip over that stuff and get straight into the “interview” with David Gardner, since he’s the one who tosses out his hints about which companies are being teased… we’ll go through the three stocks they tease one at a time:
“Why is the Internet of Things so exciting for investors like us, David?
“David: It’s exciting because what human beings are capable of achieving through technology is exciting. It’s exciting because it means that anything is possible. We can’t even dream of what kind of benefits this is going to bring 5 years from now. Let alone 10 years from now. But even I’ll admit I never thought we’d see an opportunity like this come around again, so soon after the Internet itself reached its tipping point.Are you getting our free Daily Update
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“I guess 20 years is pretty soon.
“David: I’m a little older than you. Trust me, it’s very soon.
“So you just told me that your top Internet of Things company for wireless modules is XXXXX. Why does this one stock stand out?
“David: There are a few things that catch my eye. First, this company makes the smallest wireless modules in the industry, and they’re also some of the most durable. Remember, these connections to the Internet of Things have to fit everywhere. Second, even though this company is very small, it’s got an immaculate balance sheet, with zero debt and $151 million in cash….
“They’re already selling their products to major players like Cisco… GE… Ford… BMW… Verizon. And they’re already involved in every area of the Internet of Things. From transportation, to energy, to health care, to retail, to emergency response, to agriculture, to manufacturing.”
So that one is the same stock Gardner teased for that earlier “R.I.P. Internet” starting back in November, Sierra Wireless (SWIR), which is indeed cash-rich with $151 million of net cash on the books — it’s also small, with a market cap of just over $600 million.
Sierra Wireless sells wireless modules, the little doohickeys that let machines connect to cellular networks and therefore get on line and communicate with other machines… and they’ve said in the past that they make the smallest ones, though I don’t know if that’s still true. They do have a large share of the market, roughly a third of the modules being sold are SWIR modules these days.
They’re not profitable just yet on an operating basis (they have reported a profit over the past year, though that was from discontinued operations and from the sale of their Aircard business), but analysts expect them to book a profit this year and the stock is trading for something like 20-25X their expected profits in 2015.
This is another case of a stock that analysts see growing a bit, but pretty much priced for that growth already and in a competitive market… and Dave Gardner sees it having a bigger “story,” he is looking through the foggy future into a company he seems to think will become dominant in a much larger market. So the analysts think SWIR is about as pricey as it should be in the low $20s (the average price target is $22), and David Gardner expects much more… though maybe not in one year (he and his brother, Tom Gardner, both tend to be very long-term buy-and-holders in the stocks they pick for Motley Fool Stock Advisor).
SWIR just bought In Motion Technologies, not a huge acquisition but one that gets them into vehicles and fleets (In Motion sells rugged routers for vehicles, apparently). With that new business they see their expenses going up, so they’re guiding to 6-8 cents in non-GAAP (mostly meaning, “not counting stock options expenses”) earnings for the second quarter — analysts are just taking their lead from that, guessing at 7 cents. So they do see growth continuing, but it’s not blow-your-socks-off growth — and gross margins are good at better than 30%, so if they can get substantial revenue growth they could really bump up earnings pretty quickly.
Estimates were cut a bit after the company released guidance that was below expectations last quarter, which is why the stock came down from $26 pretty quickly and is now back around $20, quite close to where it was when the Fool first started teasing this idea last Fall. Seems like a decent company to me, and I like that they are small and focused on what should be a growing industry in the “machine to machine” (M2M) networked communications, particularly after they sold off their commoditized AirCard business… but I don’t really know what their advantage is over their competitors. If you’d like a little more color on the stock and some more to think over, here’s a take on SWIR from a different Motley Fool writer. It is overvalued by most conventional metrics, but not dramatically so if they can really come close to earning 80 cents next year… so it really depends on whether you’ll think they’ll be able to grow earnings by at least 15% a year or so to justify the current valuation.
Wall Street analysts think no, David Gardner apparently thinks yes — he certainly gets some wrong, but he does have an evangelist’s zeal for companies that can “break the rules” and the growth of such companies has paid off more than once. I don’t know that he’s necessarily been great at picking companies that make little chips and modules, and that business has tended to have great competitive pressures that keep margins down for companies that can’t build big monopoly positions, but you can make the call for yourself — is SWIR right for your portfolio? Researchify and let us know what you think (just use that friendly little comment box at the bottom of the page).
While you’re looking into SWIR, we’ll move on to the second stock teased…
“And your top Internet of Things stock for middleware is XXXXX. What do you like about that one?
“David: There are a lot of competitors in this market, but this company has been the leader of the pack in data analytics for years. There’s a famous story in Silicon Valley about Steve Jobs driving to their CEO’s house to kneel at his feet…
“My other favorite bit of trivia is that this one middleware specialist does business with 134 of the 200 biggest companies in the world. That’s a good sign. But the funny thing is, the guys on Wall Street have never understood them very well… at one point they beat their earnings estimate 17 quarters in a row! Jim Cramer went on TV and said it was ‘ridiculous.'”
That one, sez the Mighty Mighty Thinkolator, is the big data pioneer Tibco Software (TIBX). David Gardner has liked this one for a long time, it was also teased by Stock Advisor about 18 months ago — at that time the stock had fallen pretty sharply after disappointing sales, and it’s been bouncing around since but is roughly a dollar cheaper than it was in January 2013. As with SWIR, estimates have been coming down for upcoming earnings over the last couple months, but currently analysts expect them to earn 95 cents this year and post 20% earnings growth next year — so if that comes to pass, you can argue that the $21 share price is pretty reasonable. Not cheap, but reasonable.
Competitive pressures are strong in the big data sector, too, not just for the cloud companies but also for the enterprise software providers like Tibco — there’s an interesting article about the recent downgrades on TIBX and the competitive threats hitting Tibco from a different Fool author here that might be worth a read. And of course, if you’ve any TIBX opinions to share, well, we’re all ears.
And one more stock for us today?
“And to put a bow on it, your top Internet of Things stock for smart services is XXXXX. What gives them a leg up?
“David: This is a global technology powerhouse with tremendous resources, that just made a big bet on IOT smart services. They bought the outfit that made your Nest thermostat for $3.2 billion. But that’s pocket change to them, and their core business is so successful that they can well afford to make this type of investment in such a huge opportunity. They just increased their cash flow from operations by 21% year over year, and it was already off the charts. But when you really look at why they’re successful, it’s because all the brightest minds in technology want to work there. They get 100,000 job applications a year, and they reject 99.5% of them!”
Well, this time there are two tickers you could swap in for that “XXXX” — it could be GOOG… or it could be GOOGL. But regardless of which class of stock they prefer, we’re talking about internet advertising (and mobile, and search, and driverless cars, and…) powerhouse Google.
So you’ve heard of them, right? Yes, they did buy the “smart thermostat” Nest a little while ago, which is one of the higher-profile “connected home” consumer-facing companies in part because of their Apple-inspired design. That is, of course, a teensy part of Google’s business even though they coughed up three billion dollars for the nascent company. Google is a massive, massive company with global reach and an almost impossibly strong grip on their core markets (internet search, advertising and video, and mobile operating systems). I own shares of GOOG (and GOOGL, for that matter), I’ve owned them since a few months after the IPO a decade ago, and I have a hard time imagining a situation when I’d want to sell them — at least, unless they get to a some ridiculous valuation.
And they’re not at a ridiculous valuation now. It’s not a cheap value stock like Apple (AAPL) based on most metrics, but it’s not expensive — it’s a blue chip stock with unassailable market share in a business that’s still growing pretty quickly, and it’s about 10% off of its all time highs of a few months ago but is still trading at more than 20X expected 2014 earnings. That’s fine as far as I’m concerned, particularly as there are expectations that Google is going to bump up growth again next year, but even if they were only growing earnings at 8-10% I’d be happy to hold the stock thanks to their dominant business and consistently high earnings… particularly because they continue to invest their excess cash into prospective growth opportunities like the Internet of Things, their Google Fiber broadband projects, and everything mobile.
They don’t give guidance, though, and can certainly have bad quarters or make eccentric-seeming investments, so it wouldn’t be shocking to have the occasional down-10% event for GOOG even if the economy continues puttering along.
GOOG and GOOGL are essentially the same thing, GOOGL is the original share class and GOOG was created when they split the shares by spinning out class “C” shares as GOOG a few months ago — that was irritating, because it just further cemented the founders’ voting control for no real reason (they had nearly complete control already), but I can handle being irritated. GOOG shares get no vote, GOOGL shares get a small vote — but in effect, no one other than Sergey Brin, Larry Page and Eric Schmidt has any meaningful shareholder vote, so if you’re interested in Google I’d just buy whichever stock is cheaper… most of the time that will be GOOG, which has tended to trade at a 1-2% discount to GOOGL.
So those are your three “The Year the Internet Disappeared” stocks … and no, the Internet is not disappearing, and these are all stocks we’ve mentioned or discussed before, sometimes in connection with previous Motley Fool ad campaigns. So what do you think? Any thoughts on GOOG, TIBX or SWIR? Any other “Internet of Things” stocks you’d prefer, or do you think it’s all phooey? Let us know with a comment below.
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