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3 Promising Internet-of-Things Stocks You Should Consider

Semiconductor companies are going to play a crucial role in the Internet of Things (IoT). Without their chips, IoT devices won't be able to talk to one another or interact with users. The IoT chip market is predicted to show an annual growth rate of almost 16% over the next five years and hit $17 billion by 2022, according to Research and Markets.

Skyworks Solutions (NASDAQ: SWKS), Synaptics (NASDAQ: SYNA), and Qorvo (NASDAQ: QRVO) are three ways investors can buy into the burgeoning IoT chip market. Each company is aggressively ramping up its IoT chip portfolio and landing lucrative partnerships that could help carve a slice of this multibillion-dollar market. Let's see how.

Different components of the Internet of Things represented in a beehive.
Different components of the Internet of Things represented in a beehive.

Image Source: Getty Images.

Skyworks Solutions

Skyworks is making an aggressive push into the IoT market to diversify its revenue streams. The company currently relies on the smartphone market for 75% of its revenue, with the rest brought in by IoT-related businesses. The chipmaker anticipates its non-mobile business to record substantial growth in the coming quarters, which isn't surprising because of its recent design wins in this market.

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Skyworks is now supporting connectivity in smart speakers from Google and Amazon, as well as smart-home alarm systems from Nest. Additionally, the company's chip designs have been selected by lighting company Sylvania, a North American subsidiary of German lighting giant OSRAM.

Skyworks is going after the smart-home niche within the IoT market, a clever move given the potential growth. Transparency Market Research estimates that the global machine-to-machine (M2M) smart-home connectivity market, which includes smart lighting and smart alarms, among others, could alone be worth $16.3 billion in 2025 as it grows at an annual pace of 13.3%.

In my opinion, Skyworks is doing the right thing by going after smart-home systems, as it is one of the fast-growing areas within the IoT space. What's more, investors can get the chipmaker at a cheap valuation -- it trades at a trailing price-to-earnings (P/E) ratio of 23, compared to the industry average of 30.

The stock gets cheaper on a forward earnings basis with a P/E ratio of just 14, so anyone looking to add an IoT stock to their portfolio should definitely look at Skyworks Solutions.

Qorvo

Skyworks and Qorvo are rivals in radio-frequency chips, so it isn't surprising that they are targeting identical areas in the IoT market. Like Skyworks, Qorvo is going after smart-home solutions, as its product development indicates.

The company launched a couple of smart-home oriented embedded chip platforms last year, claiming that its products can reduce development costs and the time-to-market for original equipment manufacturers as they support multiple connectivity protocols. The versatility of Qorvo's chips allows its customers to use a single chip platform to connect to other IoT devices, which should improve battery life that would have otherwise been hampered if multiple chips were used in a single product.

The company's smart-home chips have witnessed the strong adoption of late. During the December quarter, Qorvo's smart-home revenue increased 30% year over year thanks to design wins at Samsung, Korean consumer electronics company Humax, and another home sensor solutions provider.

The more design wins Qorvo's IoT gets, the more attractive the business becomes. Moreover, the stock presents good value at current levels. It trades at around 12 times forward earnings, substantially lower than the 30.2 industry average. And a price-to-sales ratio of 3.4 -- as compared to the 4.7 industry average -- indicates that investors won't have to overpay to buy into the company's fast-growing smart-home business.

Finally, analysts expect Qorvo's earnings to grow at almost 15% a year for the next five years, well above the 4.4% annual increase it has clocked in the past five. The chipmaker's foray into the IoT business will give it a nice boost, in the long run, making it a good bet at an attractive valuation.

Synaptics

Synaptics' IoT business has stepped on the gas of late after its acquisition of audio solutions specialist Conexant last June. Synaptics got a quarter of its revenue from IoT-related businesses last quarter, as compared to just 5% in the same period last year. IoT will continue playing a crucial role in the chipmaker's overall business given its focus on the smart-speaker market.

The Conexant acquisition has given Synaptics the ticket to ride the smart-speaker boom because of Conexant's support for Amazon's Alexa-enabled devices. Conexant's AudioSmart far-field voice development kit allows speaker manufacturers to deploy the Alexa Voice Service in their devices. This is a big deal because Amazon reportedly commands over 70% of the smart-speaker market in the U.S.

It's important to note that Synaptics' control over the AudioSmart intellectual property has led to impressive design wins of late, as more speaker manufacturers are developing Alexa-enabled devices. Harman Kardon, for instance, recently selected Synaptics' AudioSmart digital signal processors to integrate the Alexa Voice Service in their smart speakers.

The smart-speaker market is expected to grow at a compound annual growth rate of over 34% for the next five years, according to one estimate. So, demand for audio processing chips is going to increase at a tremendous pace, setting the stage for long-term growth at Synaptics.

What's more, Synaptics is trading at an attractive valuation. It has a forward P/E ratio of just 10.7, while the industry average 115. The company isn't profitable just yet, but the good part is that investors won't have to pay much for its potential sales growth given its price-to-sales ratio of 0.6, again this is significantly lower than the industry average of 6.

All three chipmakers trade at attractive valuations and all are showing great promise because of impressive partnerships that are boosting revenue already. So investors should consider these three stocks to take advantage of the burgeoning IoT chip market.

More From The Motley Fool

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Skyworks Solutions. The Motley Fool has a disclosure policy.