IoT Stocks: What to Watch in 2018

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The Internet of Things (IoT) market, which includes various gadgets connected to each other and the cloud, is expected to grow rapidly over the next few years. Research firm IDC expects global spending on IoT hardware, software, and services to rise from around $800 billion this year to almost $1.4 trillion by 2021.

However, following IoT trends can be overwhelming since the market spans multiple industries. Today, I'll examine the seven main trends investors should follow in 2018 and beyond.

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1. Expanding IoT ecosystems

Apple (NASDAQ: AAPL) and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google conquered the mobile world with iOS and Android, but the IoT market -- which includes wearables, smart home appliances, industrial machines, drones, connected cars, and other devices -- is much more complicated.

Apple is establishing IoT footholds with watchOS on the Apple Watch, HomeKit for smart home devices, Apple TV, its upcoming HomePod smart speaker, and CarPlay. Google launched Android Wear for wearables, Android Things for IoT devices, the Google Home smart speaker, the Nest thermostat, the Android TV platform, and Android Auto.

However, Apple and Google face a lot of challengers in this fragmented space. Amazon's (NASDAQ: AMZN) Echo devices are dominating the smart speaker market, and its Alexa virtual assistant interacts with a growing list of smart devices. Microsoft is also entering the market with Cortana-powered devices, while China's market is being carved up by Baidu, Alibaba, and Xiaomi.

The battle of these ecosystems will continue throughout 2018 as these tech giants launch more smart devices and operating systems to lock in users and accumulate their data.

2. Chipmakers focus on low-power solutions

As a result, demand for low-power IoT chips will grow. That's why leading chipmakers like Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM) have been pivoting toward IoT chipsets over the past few years.

Intel introduced new low-power chipsets like the button-size Curie and the SD-card sized Edison, Atom Automotive chips for cars, and computer vision chips for autonomous vehicles and drones. Qualcomm launched Snapdragon Wear chips for wearables, Snapdragon Automotive chips for cars, and the Snapdragon Flight platform for drones.

These chipmakers, along with many others, will likely unveil more IoT-oriented chipsets next year.

3. The consolidation of the IoT chipmaking market

Last year, Cypress Semiconductor bought Broadcom's IoT chip business. Sierra Wireless, the world's leading maker of embedded modules and gateways, acquired a long list of other wireless players over the past few years to become a "pure play" on the Internet of Things.

Intel acquired numerous chipmakers, including computer vision chipmaker Movidius and crash avoidance system maker Mobileye, to increase its exposure to the automotive market. These acquisitions will likely continue next year as chipmakers expand their IoT portfolios.

4. The continued growth of the wearables market

The wearables market might already seem crowded, but IDC expects global shipments to rise from 125.5 million this year to 240.1 million in 2021.

However, that market won't just include fitness trackers and smartwatches. IDC expects demand for smart headphones, connected clothing, and clip-on devices (like wearable cameras) to also accelerate.

5. A potential bubble in useless IoT devices

Unfortunately, with great hype also comes big bubbles. The land grab in the IoT market already spawned some absurd devices -- including fitness trackers for pets, smart water bottles that remind you to drink, a smart hairbrush that teaches you how to brush your hair, and a connected toaster that costs $100.

But 2018 could be even worse, and we'll likely see more half-baked connected devices flood the market and crowdfunding sites. This could lead the market to a near-term bubble, as Apple co-founder Steve Wozniak warned more than two years ago.

6. New industrial applications

The consumer-facing IoT market will likely be flooded with useless devices, but the Industrial IoT (IIoT) market should fare better. Manufacturers are already using connected machines and analytics platforms to cut costs, streamline floor operations, optimize plants, track supply chains, and ensure compliance with health and safety regulations.

Major companies in this space to watch include General Electric, which connects its industrial machines with its Predix cloud platform, and Honeywell, which offers a fully integrated IIoT analytics platform for enterprise customers.

7. New security threats

Over the past year, the Mirai botnet attack and its variants hit unsecured IoT devices like IP cameras and routers. Reports also revealed that other products -- like cardiac devices from St. Jude Medical, the Owlet Wi-Fi baby heart monitor, and TrendNET's security cameras -- could be hacked.

Unless companies offer better security for their products, consumers and businesses might think twice before linking all their devices to the IoT.

The key takeaways

The IoT is often referred to as a single growth market, but it's really a long-term trend that could lift many different companies across multiple industries. Investors who stay on top of these trends could profit as these companies expand their IoT businesses over the next few years.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Amazon and Baidu. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Baidu. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd, Cypress Semiconductor, and Intel. The Motley Fool has a disclosure policy.