The Internet of Things (IoT) promises to be the next Big Thing in technology.

If you don’t believe me, believe the industry insiders instead:

  • Gartner says the number of connected “things” will surge by 30% year over year to 6.4 billion in 2016. And by 2020, the research firm estimates there will be 20.8 billion connected devices.
  • Networking giant Cisco Systems Inc. (CSCO) expects 50 billion connected devices by 2020. And Intel Corp. (INTC) forecasts the number to balloon to 200 billion devices over the same period.
  • In terms of total dollar amounts, we’re talking about a market that will be worth more than $1.7 trillion by 2020, according to International Data Corp.’s latest estimates.

So it goes without saying that any companies tethered to this trend should enjoy exceptional long-term growth. But which ones in particular?

It’s the Patents, Stupid

In December, I identified the five biggest barriers standing in the way of this massive IoT boom – security, privacy, connectivity and interoperability, decipherability, and electricity.

Naturally, companies helping to solve those problems stand to benefit. Like FireEye Inc. (FEYE), CyberArk Software Ltd. (CYBR), Palo Alto Networks Inc. (PANW), SAP SE (SAP), HP Inc. (HPQ), and Energous Corp. (WATT), among others.

[ad#Google Adsense 336×280-IA]Today, I want to focus on another way to identify potential winners…

Many analysts like to repeat the mantra – “Stock prices ultimately follow earnings.”

While I agree – and the data backs it up – I’ve come to recognize over the years that there’s an even earlier and similarly reliable indicator.

Patents.

After all, before a company can generate profits it needs to have a product to sell.

And in today’s hyper competitive, technology-entrenched market, before a company can create a product to sell, it needs to secure patent protection for the technologies underpinning it.

With that in mind, any companies starting out today to capitalize on the emerging IoT market are at an extreme disadvantage. They have few IoT patents, if any. All they have is buzzworthy marketing material.

So these new, untested companies promise to be the highest-risk way to invest in the IoT.

By contrast, companies that recognized the IoT opportunity early and started patenting the relevant technologies stand to be the lowest-risk investments.

That’s where patent analytics and litigation firm LexInnova comes in…

Data Prove the Value of Patents – And the Undoubted Leader

In a new study, LexInnova confirmed that the IoT is more than just a buzzword.

From a macro-perspective, patent-filing activity in the space went nuts between 2010 and 2014. Annual applications and grants catapulted by nearly nine-fold to 6,810 over the period.

The reason the data stops there is because patent applications filed in 2015 haven’t been published yet.

Nevertheless, the trend is clear.

That’s the macro level. But what about the micro?

Well, as you can see, QUALCOMM Incorporated (QCOM) reigns supreme.

Not only does the company hold the most patent grants and applications in the space – 724 compared to nearest competitors Intel (688) and ZTE (351) – it also holds the most valuable patents, based on LexInnova’s analysis.

Using a proprietary algorithm, which assigns higher value to litigation-worthy patents – and boasts a 97% accuracy rate – LexInnova found that Qualcomm boasts more than double the number of “high strength” patents than the nearest competitor, LG.

This advantage promises to endure, too, as the average lifetime of Qualcomm’s patents is around 17 years.

A separate LexInnova study on the industrial side of the IoT also revealed QUALCOMM as the clear market leader in terms of total patents, strength, as well as average lifetime.

Whether You Buy Big or Buy Small… Buy Patents

Now, from an investment angle, I’ll concede that investing in an $82 billion market cap tech behemoth doesn’t get the pulse racing like a profit-loaded small-cap stock does.

Nevertheless, QUALCOMM is trading at a discount to both the market and its long-term averages.

  • Its current price-to-earnings (P/E) ratio of 17.6 represents a 10% discount to its five-year average P/E, according to Morningstar data.
  • Even better… its forward P/E ratio of 11.9 represents a 54% discount to the average company in the S&P 500.

While the discounts are understandable, given QUALCOMM’s heavy reliance on chipset sales for smartphones, plus the global slowdown in smartphone sales, the patent data indicates that investors haven’t figured out how dominant QUALCOMM will be in the burgeoning IoT market.

A market that promises to easily eclipse the smartphone, by the way. And we should be able to take that market inefficiency to the bank.

So if you can’t justify buying a mega cap, consider profiting from the trend with InterDigital Inc. (IDCC).

It ranks in the top 10 in terms of total IoT patents, in the top five for patent strength, and like QUALCOMM, it’s also trading at a discount to the market and its long-term averages.

Either way, both companies represent a low-risk, cheap way to invest in the IoT boom.

Ahead of the tape,

Louis Basenese

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Source: Wall Street Daily