Internet of Things: Apple, ARM & Intel

03/09/2016 7:00 am EST

Focus: STOCKS

Stephen Leeb

Founder and Research Chairman, Leeb Group

Stephen Leeb sees long-term potential in the Internet of Things, or IOT. Here, the growth stock expert and editor of The Complete Investor looks at a trio of technology firms well-positioned for the long-term growth of this market.

Leading the charge in IOT are Apple (AAPL) and ARM Holdings (ARMH).

Apple, of course, is the king of high-end smartphones. ARM is the world’s leading designer of semiconductor chips, with a 65 percent market share of smartphones, tablets, and modems.

You can view ARM as providing the guts of the smart devices that will be the critical controllers in the IOT, interpreting and controlling everything from traffic lights to streetlights to ambulances and more.

Over the past decade ARM’s profits have grown by 20 percent a year, with growth accelerating to around 30 percent over the past five years. The balance sheet is pristine, and the free cash flow yield exceeds 3 percent.

We’ll wait for times to calm down before adding ARM Holdings to our Growth Portfolio, but we wouldn’t argue if you buy it sooner.

Over the longer term, Apple, as the leading manufacturer of the smartphones that will be the IOT’s essential tools, shares much of the upside growth outlook of ARM.

But with more than $200 billion in cash, Apple also offers a compelling value story. And with free cash flow well into double digits, we expect Apple to deploy much of it toward new smart products.

The one most often talked about is a smart car—something that could take the IOT to a new level. Apple should be a core holding for investors of all stripes.

Intel (INTC), like many tech stocks, has had a tough time lately. But don’t write it off. In some sense Intel is a counterpart to semiconductor design company ARM Holdings.

While Intel tends to dominate the high-performance semiconductor market with both designs and manufacturing, ARM dominates the lower end.

There is more than enough room for both players. Indeed with Intel’s acquisition of Altera last year, it is now manufacturing ARM chips.

The Intel-ARM tie gives Intel entry into the ARM technology space and in the end could serve both companies very well. The Altera acquisition should take Intel into the upper reaches of IOT.

Despite heavy capital expenditures, Intel is no slouch when it comes to hefty free cash, which goes to support a growing dividend—resulting in the current better than 3.5 percent yield. Intel remains a buy in our growth portfolio.

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