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This Small-Cap Tech Company Is Quietly Ushering in the Internet of Things

It's not easy finding stocks that are on the cutting edge of their industry, publicly traded, and poised for more growth. Sierra Wireless (NASDAQ: SWIR  ) is a quiet tech company that's leading the machine-to-machine communication market, also called the Internet of Things, and its upside can't be overlooked.

Although Sierra has been on Wall Street since 2000, its business has shifted since then, with some of its technology now powering innovations in Tesla's (NASDAQ: TSLA  ) Model S. And as the company's focus has shifted over the years, so has its potential.

So, Sierra does what exactly?
Let's keep this simple. If the Internet of Things, or IoT, is the connection of everyday objects to the Internet, then Sierra Wireless is the company that makes that connection possible. IoT will allow cars to communicate with each other, vending machines to tell companies when they need to be refilled, and energy systems to manage power usage on their own. Sierra's wireless modules and cloud management services both allow formerly non-connected devices to connect to the Internet and be easily controlled.

Tesla's Model S is a perfect example of a connected car, in which Sierra provides the 3G-connection module that allows the car's infotainment system to tap into AT&T's wireless network. Tesla can then access data about the car's systems and make upgrades and adjustments based on feedback from the vehicle. Tesla is clearly a leader in automobile connectivity, but it's not the only company moving in this direction. Other car companies such as Ford, Toyota, BMW and others use Sierra's technology as well.

But cars aren't the only thing Sierra puts its modules into. Nespresso's coffee makers also have Sierra's connected devices, as do energy systems, wireless payment devices, and much more.

The company's goal is to take away all the technical aspects of the connecting devices to the Internet of Things, so that companies can focus on making their products. And Sierra Wireless is in a great position to do it.

The advantages
Right now, Sierra Wireless holds about 34% of the embedded cellular M2M module business worldwide.

Although it has worldwide IoT reach, the company is still nimble with a market cap under $700 million, $180 million in cash, and virtually no debt. In its fiscal fourth quarter 2013, ending in February, Sierra posted revenue of $118.6 million, up 8.4% year over year. Revenue for the full fiscal 2013 year hit a record high of $441.9 million, up 11.2%. 

The upside for Sierra is that it recently sold its AirCard business, which was dragging down its focus on the Internet of Things. Sierra's CEO, Jason Cohenour, said in an earnings statement that:

We achieved record revenue in the fourth quarter, closing out a year in which we delivered solid operational results, sold our AirCard business, and began putting the proceeds to work on acquisitions that extend our leadership position in M2M.

Just a few weeks ago, the company completed its purchase of a company called In Motion for $21 million. The company made rugged in-vehicle mobile routers and a secure platform to manage connected devices. Because of the acquisition, Sierra said it now has "the products, channels, and technology needed to offer the most comprehensive suite of solutions to our customers and expand our market share in high growth, high value markets such as public safety and commercial fleets." In 2013, In Motion generated $15 million in revenue, and its gross margin was 50% of revenue.

In addition to its M2M leadership position, the company just launched a new open source platform named Legato. The new platform allows companies to develop applications for machine-to-machine devices and manage them from Sierra Wireless' cloud.

Both Legato and the In Motion acquisition are aimed at adding to the company's machine-to-machine offerings, while shoring up its leadership position in the segment. And with the company selling its AirCard business, it's better positioned to focus on Internet of Things.

A few things to consider
As the Internet of Things grows, costs for connected devices will fall and hurt Sierra's margins. In fiscal 2013, gross margin was at 30.1%. Investors should continue to keep tabs on how Sierra is staying ahead of other M2M businesses, and how that impacts the cost of wireless modules. Another thing to consider is that Sierra isn't profitable right now, although that should change in fiscal 2014. If Sierra can't expand into new areas and generate more revenue, the company's prospects could turn.

Digging deeper into Sierra Wireless
The Motley Fool's put together a free report on Sierra Wireless and why it's poised to make big gains in the Internet of Things. Investors looking for a pure machine-to-machine play can be sure Sierra Wireless is ahead of the competition. To find out more of the risks and rewards for this stock, download the free report now.

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Chris Neiger

Chris has covered Tech and Telecom companies for The Motley Fool since 2012. Follow him on Twitter for the latest tech stock coverage.

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