Seven “Internet of Things” Companies Pitched by Jon Markman

Markman teases "How investors can get richer as everyday objects get smarter"

By Travis Johnson, Stock Gumshoe, November 2, 2015

The “Internet of Things” is sure getting a lot of attention these days — most people throw around the forecasted numbers of $17-20 trillion as the market for this new technology, in which everything is interconnected and data is collected about you and your appliances and the roads you drive on and, well, everything. Even Donald Trump is in on the action, at least when it comes to newsletter hype — he was pitched as the owner of a big “internet of things” company last week, and we covered that in the Friday File.

But today it’s an ad from Jon Markman we’re looking at — he talks about a bunch of internet of things companies and trends, and ends up hinting at three stocks in this “sweet spot” and then more specifically pushing you to buy four others that he calls “Shockwave Stocks” for this sector. We don’t often write about Markman, because he’s more likely to talk about short-term trades and technicals and charting than about fundamental reasons for investing in specific stocks, but he has been around for a while.

So, instead of subscribing to Tech Trend Trader (for which he’s now asking $1,697), we’re going to figure out the stocks for you and give you the names and tickers and, if I’ve got one, a quick opinion or some background… then you can think for yourself.

Which is still free, thankfully.

Here’s how Markman gets us excited about the big idea:

“The New Investing ‘Sweet Spot’ In the Internet of Things

“You see, when most investors think about the Internet of Things, they get all excited about the “things”. Those James Bond gadgets that make cool things happen.

“But the truth is that the real profits are NOT in the “things ” …

“What’s propelling the Internet of Things into a blockbuster blowout isn’t the creation of the gadgets and gizmos and things, such as our fitbits, our smart phones and iPads.

“Instead, the Internet of Things is going in a whole new direction … taking the $1.9 trillion a year ‘device’ market into a $19 trillion a year ‘connected’ market in less than a decade!

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“This utter transformation will unleash a frenzy of profit potential as companies — seasoned tech giants as well as new tech innovators — rush in to create the software, the applications, the networks and the structure to connect the whole world into the Internet.

“It will be a massive cyber-infrastructure rebuild that will happen in just a few years. Imagine every ‘dumb’ everyday object is retro-fitted or replaced with the smart version of its former self.

“The effort to accomplish this retrofit will be huge.”

No real argument with that — I have no idea how fast things will move in our increasingly interconnected world, and we’re still doing a lot of guessing when we try to imagine who’s going to be in the “sweet spot” when it comes to actually turning this big wave of connectedness into profits… but we’ve got a lot of sniffing around to do, so let’s get right to it — we’ll look in and see which seven companies he hints at in his ad:

“One company is south of D.C. but has a major nationwide impact in keeping mobile traffic running smoothly. Since the start of 2015, shares of this Internet of Things company has more than doubled — up 118% — and it’s just getting started.

“This company controls more wireless spectrum than any other independent company, including a near-monopoly on the 5G/millimeter wave cellular spectrum that is expected to become standard in the early 2020s.

“When you consider the expansion of the Internet of Things and its vast hunger for spectrum, this company is sitting on a cash bonanza . With a $480 million market cap at present, it could be worth 5X more to your portfolio in the next seven years either on its own or as a buyout candidate.”

This one’s an interesting story, though it’s one I hadn’t paid any attention to before today — the stock being teased is Straight Path (STRP), and it was indeed surging this year, up well over 100%… but then Kerrisdale Capital released a scathing “short” analysis on Thursday last week and the stock gut cut in half, so it’s now, at $30, only up 50% on the year… and it has a market cap now of about $360 million. It does not have a “major nationwide impact” on anything at the moment, though STRP believes they will do so in the future.

Straight Path owns and is trying to develop spectrum assets in anticipation of a next wave of 5G demand for the next generation of communications, which could perhaps include “Internet of Things” stuff, and with the hope that that 5G networks will use their frequencies and mmWave technology, which I can’t say that I know anything about.

The company was spun out of IDT a few years ago as their next-generation spectrum “bank”, more or less (it was part of Winstar before that, this spectrum was mostly auctioned off by the government around 2000) and they aren’t likely to generate any earnings at least until there’s some clarity about whether their spectrum or technologies will be core to the next mobile networks, and that’s all beyond my ken. I would urge you, if you’re interested in this one, to at least read the report from Kerrisdale Capital and the press release and then “still in progress” rebuttal by Straight Path (click on “Investor FAQs” from this page) that they’re updating today — they also held a conference call to respond to Kerrisdale’s attack today, I haven’t listened to that.

STRP is all about the future value of their spectrum, which I don’t think will be known for a while — but, if Kerrisdale is correct, the value could be dramatically lower than investors expect. Straight Path does refer to 5G upgrades as a 2020 story in much of their investor materials. In the meantime, they don’t spend a lot of money on operations, so they can probably keep puttering along for quite a while without running perilously low on cash. Though the legal bill will probably be going up a bit this month.

“Another company headquartered in Luxembourg but with worldwide operations is taking a lead in the design of wearables and other Internet of Things devices. Think of this company as the outsource resource for the hundreds of major industrial manufacturers who want to create connectable products but don’t have the design and software expertise.

“Just like tech companies outsource manufacturing to China, industrial companies and governments outsource Internet of Things software and hardware design to companies like this one. Its shares are up 230% since going public in 2014, and are up 120% this year alone.

“Yet it is still only a $1.1 billion company, so it has potential to advance another 5-10x over the next 10 years. Similar global software and design companies based in India sport $30 billion caps, so there is definitely room to advance.”

This one must be, sez the Thinkolator, Globant (GLOB), which is indeed a company that does outsourced design and development for wearables and “internet of things” devices — though that’s not their biggest division, but it’s a new focus… it looks like most of the examples they provide of their work are software products, mobile apps and the like. From what I can tell, they are trying to be an engineering firm that has a strong design and “pitch” ability, but from the limited numbers available in their investor presentation the financial model is pretty similar to most other outsourcers: Hire a lot of software engineers and product designers in cheaper countries with weak currencies and relatively inexpensive labor (87% of their employees are in Latin America), and have them work on projects for multinationals who pay in Dollars or Euros. That will work well, at least for a while, so their scaling-up seems pretty well-timed (they had two follow-on offerings in addition to their 2014 IPO). I don’t know anything else about them, but it’s a people business so margins can’t increase very fast (they need to hire more engineers and designers if they get more projects) — so far they’ve been able to ramp up revenues pretty nicely over their first year and a half or so, but income isn’t really growing yet (and income per share is actually falling, since they’ve sold more shares).

I’d be a little bit skeptical about their ability to ramp up earnings growth in any really dramatic way from here, so a forward PE above 30 seems a little steep to me — but they are profitable and growing their top line revenues, which is good. If it were trading in the mid-$20s it would be a lot easier to justify the valuation — which, for me, means I’d have to know the company a lot better, and really buy into something unique and qualitative about their business that should justify higher earnings, before I could buy the stock. The numbers aren’t enough to make it past the first cut otherwise, and I can’t put in the hours to become an expert at every stock that seems “OK, but a bit too expensive” … so if you think I’m missing something about GLOB, I’d be delighted to know what it is.

“A chip designer company has created a free operating system to make it simple for other companies to develop Internet-connected devices. They wanted to make it easy for their platform to be used in all kinds of soon-to-be connected devices such as appliances, streetlights and simple wearable sensors that measure heart rates, for example.

“Plus, they want to help create devices with a battery life that lasts years instead of hours. In the past seven years it’s up 900%. But that’s just the beginning. Today it is $44.77 (it went as high as 54.63 in early March … so is this a good time to buy on this pull back.)”

This one, sez the Thinkolator, is Arm Holdings (ARMH), the chip design firm that collects royalties on devices that use their chip designs and continues to develop new designs for chips that have faster performance and lower power demands. I haven’t been following this one closely, but it’s had a few great surges over the years, mostly because their lower-power chips were in huge demand for mobile devices. Perhaps they’ll have another great surge in the years to come, I don’t know, but the stock has been relatively flat for a couple years in the $40-50 neighborhood, partly because the smartphone segment isn’t growing as fast as it was a couple years ago.

The challenge with ARMH has often been that they look expensive, and they’ve almost always looked expensive — but when business does pick up sharply (if it does), their huge margins mean that earnings can grow much more quickly than revenues. Right now they’re trading at about 34X next year’s expected earnings, and analysts think they’ll be able to grow both earnings and revenue at about 15-20% per year — which is impressive for a $20 billion company.

The stock is up about 10% off of its lows because of a great 3Q earnings report that delighted investors, who are encouraged that Arm Holdings is getting design wins in more high-value devices to go along with their stranglehold on mobile phone chips, and who are buying in to Arm’s goal of building up a big business in the “Internet of Things” chips that will be needed for the gazillion little doodads that are connected to networks in the future — that’s an investment priority for Arm, not yet a revenue generator, but that could evolve into a decent business with yet more royalties in the years to come.

So those were three examples he teases of Internet of Things stocks that could boom in the years ahead, but they’re not the actual “Shockwave” stocks from his “special report” that he moves on to pitch:

“You can own the 4 Shockwave investments Jon recommends to grow your wealth with the profit potential of an Apple or Amazon.”

He gives the first two stocks away for free, as is fairly typical…

“SHOCKWAVE STOCK #1

“An Israeli company with the proprietary software every smart car will need.

“My favorite Internet Shockwave company right now is a Nasdaq-listed Israeli company called Mobileye. Mobileye has a unique, patented, proprietary software that almost every self-driving car will need.

“It’s used in Advanced Driver Assistance Systems (or ADAS) and it is sweeping the auto industry. Car makers and insurance companies love it and are pushing to put it into every new vehicle as soon as 2017.”

Mobileye (MBLY) has been a growth darling of a stock in recent years, though like many tech stocks it’s down 25% or so from its high a few months ago. Chris Versace was teasing it earlier this year as the “guardian angel” stock for the “uncrashable car,” and the stock is now right about where it was when I covered that tease in May. Still showing very high growth rates in both revenue and earnings, still priced very lushly in anticipation of continuing rapid growth.

“SHOCKWAVE STOCK #2
This company’s powerful software application revolutionizes live streaming.

“My second pick is one of the leading developers of low-power, high—definition video compression and image processing software.

“You’ll find their chips in a multitude of HD cameras, including security IP cameras, sports cameras, wearable cameras, video recorders and even drones!”

That one is Ambarella (AMBA), which you’ve probably heard of — it’s been teased and recommended for the Internet of Things because of its strength in small cameras and video processing, and for its connection to GoPro (GPRO) back when that stock was hot for a brief while, as well as for their exposure to drones (most of which carry video cameras).

I wrote about AMBA for a Navellier tease a couple weeks ago here, the stock has continued to tumble since then largely because it is so closely tied to GoPro, and GPRO issued a weak earnings report. Buying AMBA here is a bet that their continuing efforts to diversify their offerings in security, drones and other video chip markets and become gradually less dependent on the GoPro action camera business will be successful — or, alternatively, that GoPro will get their growth mojo back with new products.

Analyst estimates for AMBA have come down slightly over the last month, but only quite slightly — they’re expected to earn $3.11 in the year that ends on January 31, and about $3.60 in the following year. So that’s anticipated growth of 16%, and current-year PE of about 16. Seems about right to me for a stock in the extremely competitive semiconductor space — there’s both growth potential and risk, so you can get your greed and fear in one package… just the way it should be.

“SHOCKWAVE STOCK #3

“Builds a Cyber Fortress Around the Internet of Things…

“I believe that privacy protection and security will become an integral part of customer service. And companies will use their reputation for protecting your personal data as a way to build trust and create long-term customer value….

“My third shockwave pick is grabbing a huge chunk of this multi-billion dollar industry. This company is totally focused on network security.

“They are designing an adaptive system that can automatically shut down network pathways at the hint of a breach. Their secret sauce so to speak is their package delivery of a complete security solution which includes firewall, cloud protection, threat detection and prevention, URL filtering, mobile device protection and more.

“The stock went public just three years ago and has more than tripled in value for early investors. But with the great need for security in the Internet of Things, this company’s stock is another 10-bagger potential.

“Once Wall Street recognizes how undervalued this stock and how much money this company will make in the coming $19 Trillion Internet of Things windfall, I doubt you’ll be able to buy Shockwave Stock #3 for less than twice today’s price.”

This one doesn’t lend itself to a definitive answer from the Thinkolator, since almost all the cybersecurity companies are developing distributed “adaptive” systems, and lots of them are selling services and packages instead of security “appliances,” but for this one our best match is Palo Alto Networks (PANW), largely because of the fact that it did go public three years ago, in the Summer of 2012, and it’s up over 200% since then (207%, if you want to get specific).

The shares have dipped a bit in recent weeks, as most tech stocks have, but it is among the better performing cybersecurity stocks during that period. The only one I’ve looked at at all that’s as young as PANW and has done as well to this point (better, actually) is Proofpoint (PFPT), and that’s up 400% since they went public in 2012 — so in that case, the ad could have said “more than quintupled” instead of “more than tripled,” but really, the hints in the ad can be forced to fit either company and both have done very well. I gave up on trying to determine the winners in the cybersecurity space, so whenever it seems like one of them is exciting I throw some more money into the PureFunds ISE Cyber Security ETF (HACK). That has kept pace with the average stocks in the sector just fine, which means it has been relatively flat as a few stocks (like Proofpoint) have soared and quite a few more (like FireEye) have fallen or been weaker performers. I am not expert enough to identify which companies have the most compelling products in this space, they all sound fantastic to me, so I give up — I’m sure the sector will continue to grow rapidly absent major budget cuts (the government is a huge customer of most of the big companies), but so far I’ve just been betting on the sector instead of betting on any individual stock. (And trying to be honest with myself that I would have probably been just as likely to pick flailing FireEye a couple years ago as soaring ProofPoint.)

“SHOCKWAVE STOCK #4

“Faster Data Analysis Than Ever Before

“One company I really like is only four years old, but you’d be hard-pressed to find a public software vendor growing any faster.

“That’s because they’re offering cheaper and faster data architecture for businesses and manufacturing companies to store and analyze data. Businesses are demanding better data analysis. This young company lives and breathes Big Data with a software application to quickly process huge amounts of data.

“This ability is key to the development of the Internet of Things.

“This company went public in December of 2014. At the close of the first day of trading the share price soared 50%. Its market cap is already at $1 billion.

“This company recently announced a major acquisition that takes their technology one step closer to turning data into insights and action. Their data processing technology will soon be the backbone of the Internet of Things.

“Right now this stock is a steal. It’s trading 22% off its January high, which has everything to do with the current market volatility … and nothing to do with the company’s fundamentals.

“That makes it a huge buying opportunity.

“But you must hurry. Once the rest of Wall Street zeroes in on how cheap this stock is going for, you’ll soon see investors piling in. Invest in it now and you’ll see it quickly return to its old high.

“And with its superior analytical software driving the Internet of Things, the sky is the limit in the $19 Trillion windfall heading our way.”

This one is Hortonworks (HDP), which is a big data company that builds analytical tools and processing software for the Apache Hadoop data framework. The company was created in 2011, partly with venture funding from Yahoo, and it did jump 50% on IPO day last December… but, as a stock at least, it’s been a bit of a disappointment since then. and is down about 20%. It’s actually about 30% off the highs now, no longer just 22%, but that’s because HDP has, like many stocks, had a rough month or so… it’s gone from being a billion-dollar company to being an $850 million company.

Hortonworks did make an acquisition a few months ago to bolster their Internet of Things prospects, they acquired Onyara — which is working with the newer Apache NiFi framework. If you could, I’d like you to be imagining me nodding knowingly when I type that. I think “NiFi will really help supplement Hadoop” is going to be my new go-to cocktail party conversation starter. Honestly, there are so many different big data “standards” and frameworks, and so many different tools for merging data and visualizing data that it boggles the mind.

Is it a “huge buying opportunity?” Well, it’s lower than it was, at least. The company’s financials will not look good to you unless you’re accustomed to looking at the results of fast-growing tech companies — if you look at it the numbers compared to a larger big data “story” company like Splunk (SPLK) you’ll have a better chance of seeing something rational about Hortonworks’ valuation, but don’t try to compare them to companies who are close to making a profit. They won’t be making a profit for at least a couple more years, according to analyst guesses, and while they’re growing sales very quickly (150% last quarter) their expenses are rising not that much more slowly than their revenue (over 100% last quarter) so it might take several years of growth to build a gap between those numbers (and yes, that gap between your revenue line and your expense line is where profits can, at least theoretically, be discovered). It’s a software business, fundamentally, so it should be very scaleable — but it’s not to that point yet and doesn’t seem very close.

Hortonworks seems likely to require more funding before it reaches cash flow breakeven at this rate — they have about $140 million in cash as of last quarter, and have been running through about $40-50 million in cash per quarter — I didn’t check to see how they’re structuring the Onyara acquisition, or how big it might be. So what you’re buying with Hortonworks is the growth story, and whatever it is about them that makes their big data management and analytics system different than or better than the dozens of other companies selling big data solutions. For that, you’re on your own — that’s one of many areas where I can’t pretend to become an expert in a few minutes of research.

So, do those seven sound appealing to you? Anything you’d buy to get in early on this increasingly interconnected world? Let us know with a comment below.


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devin
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devin
June 29, 2016 1:52 pm

Hi TRavis-
I don’t recall if you named the internet of things choice by Paul Mampilly please let me know where I can find it.
thanks very much
Jim Gill

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