Sequans Communications SA: Beaten-Down 5G Play Could Double or Triple

Contrarian 5G Chipmaker Looks Compelling

While the technology sector made impressive gains in 2020, there’s some hesitancy this year. This means opportunities.

Take the case of France-based Sequans Communications SA (NYSE:SQNS), a battered 4G/5G play that’s down by 42% over the last three months but showing signs of improvement.

The company is a fabless developer of 4G and 5G chips and modules for Internet of Things (IoT) devices. Sequans is established in 4G and could benefit from the increasing demand for 5G solutions.

High Risk/Reward Opportunity for SQNS Stock

The Sequans Communications stock chart shows the selling in March 2020 and the volatile rally in July to above the pre-COVID-19 level.

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SQNS stock failed to hold its July high, subsequently declining to its November low. The stock staged a strong rally to a high in February 2021, but again it failed to hold, retrenching to key support around $5.50.

Chart courtesy of StockCharts.com

The downside risk is the $4.00 level, but considering that Sequans Communications stock traded at $19.00 in 2017 and at $78.00 in 2011, the upside is massive.

Revenues Look Great But Profitability an Issue

Sequans Communications SA, like many small technology companies, faces issues with delivering consistent results.

But after four years of doing little in terms of improving its revenues, the company delivered strong revenue growth of 66.1% in 2020 to a five-year high of $51.3 million.

Fiscal YearRevenues (Millions)Growth
2016$45.5N/A
2017$48.87.2%
2018$40.2-17.5%
2019$30.9-23.3%
2020$51.366.1%

(Source: “Sequans Communications S.A. ADR,” MarketWatch, last accessed May 10, 2021.)

And with the strong tailwinds for the 5G sector, Sequans could benefit.

The company’s revenues are expected to jump 26% to $64.6 million in 2021, followed by 56% to $100.8 million in 2022. (Source: “Sequans Communications S.A. (SQNS),” Yahoo! Finance, last accessed May 10, 2021.)

If Sequans can deliver on the estimates, the company would be trading at only 1.9 times its consensus revenue estimate for 2022. This would provide a bull case for SQNS stock.

One problem facing Sequans Communications SA is the company’s ability to control its costs and offer a pathway to positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

Fiscal YearEBITDA (Millions)Growth
2016-$16.4N/A
2017-$17.5-6.7%
2018-$29.5-68.6%
2019-$22.922.2%
2020-$20.411.1%

(Source: MarketWatch, op. cit.)

Another challenge facing the company is to achieve positive generally accepted accounting principles (GAAP) diluted earnings per share (EPS).

Fiscal YearGAAP Diluted EPSGrowth
2016-$1.56N/A
2017-$1.3711.7%
2018-$1.56-13.4%
2019-$1.56-0.1%
2020-$1.93-23.9%

(Source: MarketWatch, op. cit.)

But as its revenues ramp higher, I would expect things to improve for both EBITDA and EPS.

Sequans Communications SA is expected to narrow its adjusted loss to $0.56 per diluted share in 2021, compared to a loss of $1.17 in 2020. The situation looks even better for 2022, with the loss predicted to drop to $0.17 per diluted share. (Source: Yahoo! Finance, op. cit.)

Analyst Take

The contrarian bull case for Sequans Communications stock is supported by the company’s strong expected revenue growth and pathway to profitability.

In my view, SQNS stock could easily double from its current level if Sequans Communications SA can take advantage of the 5G push and deliver consistency in its financial results.