Sierra Wireless, Inc.: Internet of Things Could Send SWIR Stock Skyrocketing

Sierra WirelessMore Upside for SWIR Stock?

Sierra Wireless, Inc. (NASDAQ: SWIR) is referred to as a pure play in the Internet of Things (IoT) space. It makes communication devices like SIMs, routers, gateways, and embedded modules and offers cloud and connectivity services.  In layperson’s terms, Sierra Wireless, Inc. makes products for—and offers services to—companies that build smart machines and want to have them “talking” to one another through a subscription-based or stored network. (Source: “Sierra Wireless Corporate Overview,” Sierra Wireless, Inc. June 2016.)

The problem for me is that the biggest part of Sierra Wireless business earns them the lowest margin of any of their three segments.

Year ended December 31, 2015
OEM Enterprise Solutions Cloud and Connectivity
Revenue 523,366 63,072 21,360
Gross Margin 29.0% 52.5% 41.8%

(Source: SIERRA WIRELESS INC (Filer) CIK: 0001111863, U.S. Securities and Exchange Commission, last accessed August 28, 2016.)

To make matters worse, in their recent earnings announcement (second quarter 2016), Sierra Wireless, Inc. reported that their third-quarter revenue and earnings would be below the low end of their previously stated guidance. Sierra Wireless stock had its commensurate and obligatory sell-off that same day. And this came in the face of rather spotty earnings reports for Sierra Wireless stock in the previous three quarters. This is just the kind of uncertainty that makes investors nervous. But there may be a silver lining here for SWIR stock.

Q115 Q215 Q315 Q415 Q116 Q216
Revenue 150.40 158.00 154.60 142.80 142.80 156.20
EPS 0.22 0.26 0.23 0.08 0.08 0.20
YOY Change 1000.0% 225.0% -4.17% -72.41% -63.64% -23.08%

(Source: “Sierra Wireless Quarterly Reports: 2016,” Sierra Wireless, Inc. last accessed August 28, 2016.)

In the last three years, Sierra Wireless, Inc. has made a number of acquisitions that bolster its “Enterprise Solutions” and “Cloud and Connectivity Services” businesses—the ones with the rich gross margins. The most recent of these just closed earlier this month. (Source: “Sierra Wireless completes acquisition of telematics firm GenX Mobile,” Wireless, August 11, 2016.)

The reason this is good news is that these acquisitions will in, my opinion, serve as the catalyst for improved SWIR stock earnings into 2017 and beyond, which could send Sierra Wireless stock higher over the next 12 to 18 months. The trouble that Sierra Wireless, Inc. is having now, again in my opinion, can be attributed to growing pains. They’re making investments in a very niche segment of the IoT space (namely, fleet management) that all by itself is expected to be a better-than-$30.0-billion market (again) over the next 12 to 18 months.(Source: “Fleet Management Market at $30.45 Billion by 2018,” Machine2Machine Magazine, December 13, 2013.)

Why SWIR Stock is Worth a Closer Look

So, for investors that can stomach a little volatility, and whose investment horizons are more than a year, Sierra Wireless stock may be worth a closer look. When you take that look, consider that for all the bumps in the road that Sierra Wireless has endured lately, this is a solid company with an impressive balance sheet, given that they have zero long-term debt.

Consolidated Balance Sheet

(Source: U.S. Securities and Exchange Commission, op cit.)

As such, Sierra Wireless stock could be a winner in the Internet of Things economy.