Forget Sierra Wireless, Skyworks Solutions is the Better Internet of Things Stock

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The Internet of Things (IoT), which connects various devices to each other and the cloud, is widely expected to be the "next big trend" in technology. Research firm IDC expects worldwide IoT spending to rise from about $800 billion this year to nearly $1.4 trillion by 2021.

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Those types of forecasts have cast a spotlight on Sierra Wireless (NASDAQ: SWIR), the most well-known "pure play" on the IoT market. Sierra is the world's top supplier of 2G, 3G, and 4G embedded modules and gateways, which are used in M2M (machine-to-machine) communications. Sierra's stock is up more than 20% for the year, outpacing the S&P 500's 15% gain.

However, I think investors interested in the IoT market should also consider Skyworks Solutions (NASDAQ: SWKS), which supplies power amplifiers, front-end modules, and RF chips to a wide variety of customers. Skyworks is a major Apple (NASDAQ: AAPL) supplier, and 39% of its revenues came from the iPhone maker in fiscal 2017.

But if we look beyond the iPhone, we'll notice that Skyworks is also a compelling play on the IoT market -- perhaps even more than Sierra Wireless.

Comparing Sierra and Skyworks' IoT strategies

Sierra controls a third of the worldwide market for M2M embedded modules according to ABI Research. It repeatedly expands that portfolio through acquisitions, which include smaller wireless players like AnyData, Maingate, Mobiquithings, GenX Mobile, and Numerex, as well as GlobalTop Technology's GNSS (global navigation satellite system) unit.

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All these moves widened Sierra's moat while growing its top line. Simply put, the company wants to ensure that any device that wants to "talk" to another device does so via its modules and gateways.

Skyworks still relies heavily on Apple, but it's gradually reducing its dependence on the iPhone in several ways. First, it's putting its SkyOne modules (which link devices to wireless carriers worldwide) into leading Android devices from Huawei, Samsung (NASDAQOTH: SSNLF), Vivo, and Oppo. Its content share in these phones should rise with each generation, as newer devices require better wireless connectivity.

Second, Skyworks is putting more modules into smart speakers, drones, wearables, and connected cars. Therefore, if demand for Apple's flagship device peaks, Skyworks can likely rely on the growth of those nascent IoT markets to pick up the slack.

Comparing Sierra and Skyworks' growth

Sierra Wireless has posted four straight quarters of double-digit annual revenue growth, fueled by robust demand for its modules in the automotive, energy, networking, payment, and mobile computing markets.

Analysts expect its revenue to rise 11% this year, compared to just 2% growth last year. Its earnings are expected to grow 49% thanks to stronger sales and lower production costs from its scaled-up operations.

Skyworks has posted three straight quarters of positive annual sales growth, with two consecutive quarters of double-digit growth. Wall Street expects its revenue and earnings to respectively grow 11% and 14% this year thanks to strong iPhone sales and its continued growth in adjacent markets.

However, investors should note that Skyworks has consistently higher gross margins than Sierra, since the production of its analog chipsets is a lower-cost affair:

Valuations and dividends also matter

Sierra might look like a better "growth" play than Skyworks, but investors should also mind the valuations and dividends. Sierra trades at 27 times earnings and 17 times next year's earnings, while Skyworks trades at 20 times earnings with a forward P/E of 15.

Sierra also doesn't pay a dividend, since it spends most of its cash on acquisitions and investments in new modules. Meanwhile, Skyworks pays a forward dividend yield of 1.2%, which is supported a low payout ratio of 21%. It's raised that dividend every year since its introduction in 2014.

The bottom line

I still think Sierra Wireless is great Internet of Things stock. But I also think Skyworks has more to offer investors with its exposure to the iPhone, investments in other IoT markets, higher margins, lower valuation, and consistent dividend growth. Therefore, I believe that Skyworks should continue outperforming Sierra through the end of the year.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Sierra Wireless, and Skyworks Solutions. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short January 2018 $105 calls on Skyworks Solutions. The Motley Fool has a disclosure policy.