Industrial internet of things is expected to be the next big thing, with the number of IoT devices across the globe expected to triple in four years. This, along with the huge demand for compact, space-saving chips and semiconductor solutions in the telecommunications field during the expected rollout of 5G, is bound to benefit semiconductors players within this space. A promising small-cap stock within this space that has built an impressive portfolio of faster, low-power memory chips over the years is Adesto Technologies Corp. (IOTS, Financial).
The company works with over 5,000 customers, including Apple (APPL, Financial) and Amazon (AMZN, Financial), and earns about half of its revenue from the long product cycle industrial IoT market, which is expected to grow at a rate of more than 20% per annum according to McKinsey & Co. data. Adesto has a history of margin expansion and is a strong candidate after its price rebounded following the coronavirus crash.
Company overview
Founded in 2006, Adesto Technologies is a provider application-specific semiconductors and embedded systems that comprise the main building blocks of IoT edge devices.
Based in Santa Clara, California, the company has a wide portfolio of semiconductors and embedded technologies that are designed for connected IoT devices used in industrial, consumer, communications and medical applications. Adesto also provides software solutions, software development kits, tools and system solutions to help speed time to market for customers. Its solutions enable seamless access to data, allowing for intelligent control of things in today’s connected world. Adesto’s technology is used by more than 5,000 customers worldwide who are creating differentiated solutions across industrial, consumer, medical and communications markets.
Strong customer base
Adesto has a very unique chip solution that not only helps device makers extend battery life, but also save space, reduce costs and speed up their products. As a result, Adesto has very solid demand from some of the largest corporations in the industrial, consumer, medical and communications sectors, which could lead to strong revenue growth over a period of time.
Apple is one of the biggest clients where Adesto’s chips are used in the current generation of AirPods, with a strong likelihood of the trend continuing for the AirPod Pro and other designs. With Adesto increasing its range of products, there is a strong likelihood that it could become the sole supplier to Apple in this area in a few years’ time. Industrials as a sector contributes to more than half of the company’s revenue and includes products such as smart meters, electric/gas/water industrial IoT and automation; the end consumers are giants like ABB (ABB, Financial), SolarEdge (SEDG, Financial), Itron (ITRI, Financial), Lam Research (LRCX, Financial) and others. With respect to consumer goods, the company’s products have an applicability in wearables, hearables, far-field voice recognition, Bluetooth and wireless solutions, where end customers are companies like Amazon, Samsung (XKRX:005930), Universal Electronics (UEIC, Financial), Parrot, Ozobot and Roku (ROKU, Financial).
IoT Macro is strong
After many years of hype, anticipation and steady uptake, the internet of things has finally moved into mainstream business use. From factory robots to autonomous cars, IoT is expanding its reach. As per the research conducted and published by McKinsey Digital, the number of businesses that use IoT technologies has increased from 13% in 2014 to about 25% in 2019. The worldwide number of IoT-connected devices is projected to increase to 43 billion by 2023, an almost threefold increase from 2018. Advanced principal technologies and a proliferation of devices have helped fuel the growth of IoT technologies.
Adesto provides a full stack of IoT solutions that are most pertinent to the industrial sector. It caters directly to equipment manufacturers rather than the open market. There is also a strong relevance of the company’s mixed-signal ASICs data converters and its non-volatile memory solutions in the consumer-oriented sectors as well as the medical and communication sectors. Adesto’s chips also provide advanced controller and memory functions, making the company essential.
As for telecom, there is a visible future tailwind as IoT is still in the early stages and will receive a major boost with the advent of 5G. Management expects 10 billion connected IoT devices by the end of 2020 and 14 billion by the end of 2022 based on IoT Analytics 2018 data. This could be one of the biggest drivers for Adesto’s revenue growth as well its stock price in the near future. There is a strong application of Bluetooth and wireless solutions in the medical devices industry as well, with end clients including Johnson & Johnson (JNJ, Financial), Boston Scientific (BSX) and Dexcom (DXCM), among others. Thus, the strong base of end customers and their demand is expected to drive Adesto’s future demand.
Key takeaways
Adesto’s stock has had a topsy-turvy trajectory since the Covid-19 crash, but the stock has certainly recovered and is close to its 52-week high even in these tough times. However, the enterprise value-revenue ratio of 3.19 is actually quite low when compared to other semiconductor companies like Ambarella (AMBA) and Lattice (LSCC). The company is making new inroads through its highly compact, space-saving, cost-saving chip solutions and catering to the needs of tech giants like Apple. It is well positioned to deliver excellent returns even from current levels.
Disclosure: No positions.
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