Our Favorite Internet of Things Stocks for 2016

By Fool.com

Imagine adjusting your house's temperature, lighting, and security settings while you're at work, or turning your oven on to cook a holiday meal, or even checking in on a video stream of your children and pets to make sure everything is sound on the home front. These features may sound like something out of an episode of The Jetsons, but The Internet of Things (IoT) revolution is already unlocking the potential of a fully connected world and making widespread inter-device connectivity a reality.

Continue Reading Below

The Internet of Things is also set to be a big driver in the business world, and 2016 looks to be a year in which the big players in the IoT tech push gain some serious ground.

To get an idea of which Internet of Things stocks could be big winners in 2016, we asked three Motley Fool contributors to spotlight their picks for the coming year's top IoT stock. Read on to learn which IoT companies could be big beneficiaries of bringing the digital world together in 2016.

Image source: Alphabet.

Tim Brugger: According to Juniper Research, there are more than 13 billion IoT devices in use, and that figure will nearly triple by 2020. One big piece of the IoT pie will be smarthomes, a market expected to grow to nearly $60 billion in four years. That's good news for Alphabet and its Nest smart thermometer, smoke, and carbon monoxide detector.

There was some consternation when Google wrote a $3.2 billion check for Nest in early 2014. It turns out, Alphabet's acquisition of Nest was just the first step in securing its place as the leading smarthome provider. A $555 million deal for video monitoring manufacturer Dropcam was Alphabet's next foray into IoT, and that was quietly followed by its acquisition of Revolv.

The deal for Revolv may have flown under the radar, particularly compared to the nearly $4 billion spent on Nest and Dropcam, but it may have been Alphabet's biggest IoT move. Revolv helped Alphabet solve one of the smarthome market's biggest challenges: finding a way for all those connected devices to "talk" to each other. Nest is now the hub of Alphabet's smarthome product suite, and it's even initiated a mass marketing campaign to raise awareness among the masses.

Another reason Alphabet belongs on a short list of IoT stocks in 2016 is its proven ability to utilize data to enhance a user's experience, either online or in a smarthome, and improve its marketing results. And as big as the IoT device market is expected to become, the real value lies in utilizing the data. As per Juniper Research, data will become "the backbone of its [IoT] long-term success," and Alphabet's ready and waiting to take full advantage.

Image source: Microsoft.

Daniel B. Kline:As it controlled the personal computing world for so many years through its Windows operating system, Microsoft wants to do the same with the IoT. The company designed its latest OS, Windows 10, to operate as a slimmed-down operating system for all manners of devices. The company has grand plans for its OS, which Windows boss Terry Myerson spoke about at the company's 2015 Build developers conference.

"Our goal is that within two to three years of Windows 10's release there will be 1 billion devices running Windows 10," he said. "No other platform version in any ecosystem is available on 1 billion devices. Current estimates for Google Play KitKat is at a little over 500 million devices. iOS 8 is lower than that."

Myerson was speaking to developers he was trying to convince to work on Microsoft's platforms, but there is no reason to believe the company won't hit its numbers. In fact, if Gartner'sprediction that "6.4 billion connected things will be in use worldwide in 2016," there is reason to believe one billion may be a low prediction for Microsoft.

Windows still powers the vast majority of business computers running globally. It's the accepted operating system of enterprise, and it's simply logical that many existing Microsoft partners will extend that to IoT products. That should give Microsoft a whole new revenue stream and allow it to make Windows a growth product after years of seeing market share move to tablets and other devices running Android, iOS, and even Chrome.

Image source: Ambarella.

Keith Noonan:Ambarella's roller coaster 2015 looks to be ending in a valley rather than a peak, but 2016 could be a big year for the company and its stock. After climbing as high as $129 in June, Ambarella now trades in the $59 range, and the sizable drop could present a good jumping-in point for those who see promise in the company's Internet of Things technologies.

Ambarella's chips for Internet-connected cameras are still best in class, and a range of new products, combined with the possibility that the market has been overly punishing after unfavorable news, creates the potential for an explosive 2016. Recent stock sell-offs are partially tied to under-performance from its biggest customer, GoPro-- which saw its HERO4 Session camera find less success than anticipated -- however, the extent of Ambarella's dependence on business from the popular camera maker seems to be overstated. In the action camera space, Ambarella also provides chips for GoPro competitors including Garmin and Xiaomi, and the company is at the forefront of enterprise security, home monitoring, and drone cameras, while also having compelling positions in cameras and sensors for automobiles, light fixtures, and doorbells.

Featuring in IoT cameras from big smarthome players like Alphabet and Comcast, as well as a range of products from Chinese manufacturers, should create a significant growth opportunity for Ambarella in 2016. Making the picture even brighter, GoPro should also have a much more favorable product makeup in the coming year.

With momentum in growing product segments and its lowest trailing-12-month P/E value since 2013, Ambarella could be one of 2016's big IoT winners.

The article Our Favorite Internet of Things Stocks for 2016 originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Kline owns shares of Microsoft. Keith Noonan has no position in any stocks mentioned. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Ambarella. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.