If you’re evaluating your portfolio this Christmas and find yourself mourning ARM, or regret missing out on those gains like I am, a combination of IQE Group (LSE: IQE) and Imagination Technologies (LSE: IMG) could be the perfect start to the New Year.

IQE

IQE is one of the leading global suppliers of wafer products and services to the semiconductor industry. In plain English, this means it supplies manufacturers in the wireless communications, solar power, infrared and LED tech spaces with customised wafers, which are then used to create microchips. If you want to start your research by finding out more about its manufacturing process, just click here.

The company has grown revenue from £73m in 2010 to £114m last year, with operating margins increasing from 9.9% to 13.3% in the same period. The company is creating more profitable intellectual property, for which it then receives licensing fees in a model similar to ARM’s.

So far so good. But the business only generated £3.5m, or 5.5%, of revenues through licensing in the first half. Yet it could be a very scalable, and thus profitable, operation for IQE.

In a trading update, it said it will beat earnings forecasts this year thanks to the strong performances across “across multiple markets, particularly in the photonics business.”

IQE is a niche player with plenty of tailwinds behind it, including the fact that smartphones are now an indispensable part of all our lives, as well as the internet of things (IoT) and LED technology. At only 13 times last year’s earnings, the company could deliver impressive returns from here.

Imagination Technologies

Imagination Technologies shares more similarities with ARM. Its tagline is Developing and Licensing Core IPs.

Like ARM, it designs chips for use in smartphones and tablets. It also makes its cash purely from licensing, allowing it to dodge the high capex costs that saddle anyone who actually creates products.

Imagination has had a tough year or so, swinging from a £5.7m operating profit to a £61.5m loss in 2016 due to poor performance in a number of non-core businesses.

I appreciate the decisive moves made by management, including the ongoing disposal of those non-core assets such as Pure, IMGsystems and IMGworks. The company is now focusing on the areas where it has the greatest advantages.

Its restructure should result in a return to profit next year, but with a market cap of £700m, a purchase at these prices requires unwavering faith in its IP.

The post Still mourning ARM? Why not replace it with IQE plc and Imagination Technologies Group plc? appeared first on The Twelfth Magpie.

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Investors looking to benefit from the IoT trend should take a closer look at these stocks.

High hopes

Graphics chips designer Imagination Technologies (LSE: IMG) could stand to gain from the growing video processing requirements of IoT devices to deliver ever better user interfaces. The company also has a growing presence in the processing and radio processing chip markets and has high hopes from the scalable IP solutions it can offer to IoT products.

However, investors need to be aware that Imagination is currently heavily exposed to Apple, which accounts for nearly half of the group’s total revenues. With this dependence on a single customer, Imagination’s share price is highly susceptible to Apple’s iPhone sales figures. And since Apple’s new iPhone 7 sales have fallen short of earlier expectations, Imagination’s shares have trended downwards too.

Nevertheless, city broker Liberum is sanguine. It believes that demand for the larger iPhone 7 is doing better than the market currently expects, and supply shortage means Imagination could expect to get higher royalty payments from Apple in 2017.

Car market

As manufacturers rush to install wireless IoT devices in your cars, Laird (LSE: LRD) is well positioned to benefit, especially following its recent foray into the automotive sector. Laird acquired German connected car solutions company Novero back in 2015, in order to gain access to the fast-growing automotive chip sector, but things haven’t been plain sailing.

Novero’s profitability has been a drag on the group’s performance and Laird has been finding the restructuring and integration process costly. But in the longer run, the company’s diversification could eventually pay off for investors. The company has made a big step in the automotive business, and it comes just as smartphone demand is beginning to decline. And since the automotive sector is the fastest-growing segment in the chip market, it offers a very exciting opportunity for the firm.

Industrial applications

The rise of the IoT isn’t just about improving connectivity for consumer goods. We’re seeing the impact of the IoT in industry too. Whether it’ll be in energy, transportation, or manufacturing automation, smarter machines can be used to better track performance, improve efficiency and increase profits. And at the heart of this Industrial Internet of Things, or IioT, is machine-to-machine (M2M) connectivity.

Here, CML Microsystems (LSE: CML), which designs and manufactures mixed-signal and Radio Frequency (RF) semiconductors, stands to benefit. The company is focused on two highly niche markets in global communication and solid state storage, which allows it to concentrate on ensuring quality and reliability, and enables it to meet the demanding specifications of industrial and professional applications.

After a difficult period in the past few years, things are picking up again, with city analysts expecting its earnings to grow by 3% this year, and 16% for 2017/18. This implies the shares are valued at a forward P/E of 20.9 and 18 respectively.

The post 3 Internet of Things stocks to change your future appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Put simply, the IoT is the term for enabling everyday objects like fridges, telephones, cars, microwaves and even front doors to communicate with one another. Traditionally, this is known as machine-to-machine (M2M) communication and has been around for some time. Vodafone (LSE: VOD), for example, has been a world leader in the supply of M2M services for more than two decades.

However, recent technological advances such as the development of ARM Holdings’ (LSE: ARM) low-cost, low-power, high-speed microchips have made this technology more accessible.

Huge market 

The potential size of the IoT market is huge and not to be underestimated. Figures vary, but it’s estimated that there are 50 billion devices set to be connected to the internet by 2020. Forecasts show that the global IoT market could be worth $7.1trn by 2020, up from the value of $1.9trn as reported during 2013.

And this is where both ARM and Vodafone are set to benefit. Indeed, as a world-leading telecommunications company and leader in the M2M market, Vodafone’s services should be in demand as users look for IoT/M2M solutions for their businesses. 

According to Vodafone’s Global Enterprise Chief Executive Officer, Jan Geldmacher, companies that fork out cash to either develop or purchase IoT devices are now likely to see a return on investment within two years. This short pay-back period is likely to attract many businesses towards the technology.

What’s more, the rising demand for IoT devices will be a shot in the arm for Vodafone’s growth, as the company grapples with declining sales of traditional services like voice and text. If Vodafone can maintain its leading position and capture a significant share of the IoT market during the next few years, the company should have no problem returning to growth.

As a quick comparison, while the IoT market is expected to expand by around 270% by 2020, global smartphone shipments are only expected to expand 80% by 2018. 

Leading the way

While Vodafone is leading the way in M2M communication services, ARM is moving to dominate the IoT microchip market.

ARM has been diversifying its product offering during the past few months to try and draw in customers. And this diversification, along with a targeted marketing strategy — giving away free software to manufacturers of smart devices — should help the group cement its position in the IoT market.

ARM’s components are already used in 95% of the world’s smartphones, so the company has a solid base from which to grow from. The company recently announced that the 50 billionth chip containing an ARM processor had been shipped by partners. Management’s next target is 100bn chips shipped.

A key strategy for reaching this milestone is ARM’s ARMv8-A technology. A total of 27 companies have signed agreements for ARMv8-A technology. This includes all of the top 10 companies who sell application processors for smartphones.

The ARM ARMv8-A technology is designed for high-power computing, in an age where tablets and smartphones are quickly replacing PC and laptops for many tasks. This involves a jump from ARM’s traditional stomping ground of 32-bit computing to more powerful 64-bit computing. ARMv8-A processors are designed specifically for this purpose.

Huge potential 

All in all, the IoT market is growing rapidly and is set to be worth $7.1trn globally by 2020. ARM and Vodafone are both well placed to grab a share of this market. If the two companies can grab even a low single-digit percentage of this market, earnings will surge. 

The post Why Vodafone Group plc And ARM Holdings plc Can Profit The Most From The Internet Of Things appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.