The number of devices getting connected to the internet is accelerating, and investors are jumping on board. Much of the buzz is about the hardware and the smart devices themselves, such as watches, lightbulbs, and thermostats, but as the Internet of Things (IoT) expands, the longer-term opportunity is in the software and services that run those devices.
How big is the IoT?
An oft-cited study from tech researcher Gartnershows the number of IoT devices more than tripling in the next few years. By the end of this year, the estimate is for 6.4 billion devices to be in use. That swells to nearly 21 billion by 2020. Other estimates put the figures even higher than that.
The thought of billions of new devices coming online in the next few years has increased interest in many of the companies that sell those products to consumers. Though some of these companies stand to continue growing in the years ahead, investor interest has driven some valuations sky-high. Take smartwatch and connected fitness device maker Fitbit (NYSE: FIT) as an example.
Even after a big tumble in share price at the beginning of the year, the price-to-earnings ratio for the past 12 months’ worth of profits are still on the high end for Fitbit, near 29. The market is pricing in massive profitability growth in the year ahead, as indicated by a significantly lower one-year-forward price-to-earnings ratio of only 9.6. It remains to be seen whether the device maker can pull that figure off and reward investors’ high hopes, but the numbers illustrate the lofty expectations many have for the hardware side of the IoT.
However, one fact often missing from the IoT discussion is that, while the number of devices is expected to triple in the next few years, spending on the IoT is expected to only double over the same period of time. That implies two things: (1) The cost for the average connected device will fall over time and (2) device sales will eventually slow down. With all the rage in IoT surrounding the hardware, the real point of the IoT is getting overlooked: the convergence of the real world with the software world.
