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Semiconductor stocks were hit hard by the recent market sell-off, but the underlying business of this industry is growing—and should continue that trend in 018 and beyond. Throughout the chip-making space, companies have successfully adapted to the changing needs of the consumer, including an increased demand for small, high-powered chips that enable “Internet of Things” (IoT) devices.

For those that don’t know, the Internet of Things is the growing world of interconnected household and industrial devices. Everyday products and machines can now be embedded with sensor to process or interact with other electronic devices.

For example, consumer-level IoT products include things like Amazon’s (AMZN Free Report) Echo “smart speaker,” wearable motion and activity tracking products, and advanced in-car technology. On the commercial side of the IoT market, industrial manufacturers have begun implementing sensors into machines to track performance and efficiency.

(Also Read: How to Invest in the “Internet of Things”)

As demand for the microchips that power these IoT devices continues to grow, semiconductor manufacturers with a focus on IoT products will continue to benefit. And promises to be another marquee year for these suppliers, with the number of connected devices worldwide set to continue its rapid growth.

With that said, we’ve found three already-strong stocks that are looking to benefit even more from further IoT growth in 2018:

1. Texas Instruments (TXN Free Report)

Although you might recognize the brand because of its calculators, Texas Instruments is actually one of the leading suppliers of advanced semiconductors in the world. The company’s IoT profile falls under its Embedded Processors division, which includes the Connectivity, Microcontrollers, and Processors categories.

Texas Instruments reported year-over-year growth of 20% in its Embedded Processors division during the most recent quarter. The firm also surpassed revenue estimates and released in-line guidance. TXN is now sporting a Zacks Rank #2 (Buy). Meanwhile, the stock has a P/E of 22.4 and a PEG of 2., so investors are getting a decent price for its earnings and earnings growth outlook.

 

2. ON Semiconductor Corporation (ON Free Report)

ON Semiconductor has traditionally been known as a power management and commodity chip maker, but the company has started to carve out a budding IoT division. ON is now heavily involved with automotive solutions, and its IoT offerings also include products catered to wearables, smart city development, and industrial automation.

ON is currently a Zacks Rank #2 (Buy) and has emerged as an interesting earnings growth pick. The company is expected to post EPS growth of 86% in its current quarter and 19% for the full year. Overall, the firm is projected to improve its earnings at an annualized rate of more than 12% over the next three to five years. But the stock is also trading with a P/E of 15.4 and a P/S of 2.0, so it looks pretty cheap right now.

 

3. Intel Corporation (INTC Free Report)

Intel is one of the world’s largest semiconductor companies, and it has proven to be a leader in the Internet of Things chip business. Intel’s IoT businesses cater to the automotive, retail, industrial, and smart video markets. But the firm also believes in the wide-ranging power of IoT technology and stands ready to influence the industry, wherever it may go.

Intel recently crushed earnings estimates by nearly 26%, extending its strong earnings surprise streak and inspiring positive revisions for upcoming quarters. The stock is now carrying a Zacks Rank #2 (Buy). The company is also extremely financially sound, generating about $5.32 in cash per share and operating with a better-than-industry-average net margin of 15%. Intel also offers a respectable 2.3% dividend.

 

Bottom Line

The Internet of Things is one of the most exciting emerging tech markets in the world.  And while these specific products are interesting, the moneymakers in these situations are the companies that are building the tech that powers these products. The Internet of Things needs semiconductors to function, and as the IoT grows, so too will semiconductor companies.

The best way for investors to cash in on this growing trend is to identify semiconductor companies that are not only investing in the Internet of Things, but are also displaying solid fundamentals and impressive Zacks metrics.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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