Is Sierra Wireless, Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Sierra Wireless (SWIR) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Sierra Wireless' story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Sierra Wireless' key statistics:

SWIR Total Return Price data. Source: YCharts.

Source: YCharts. * Period begins at end of Q1 2011.

SWIR Return on Equity (TTM) data. Source: YCharts.

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Sierra Wireless roars through our tests with its afterburners on to capture six out of seven passing grades, missing out on a perfect score only due to the more modest growth in its free cash flow relative to its net income. Both metrics began similarly in the red when our tracking period started, but Sierra's net income has soared to eight times the size of its free cash flow.

This discrepancy may be worth some investigation, but the fact remains that Sierra has done an excellent job pulling itself up to profitability since 2011, and investors have been rewarded along the way. Can this strong growth continue? Let's dig deeper to find out.

Sierra's shares have been on a wild ride this year after soaring throughout 2013, but the general trend has been lower, with shares still off 15% from where they started the year. Sierra's biggest move of late hit shareholders in early May, when a "weak" -- this is a relative term, as you'll see -- quarterly report sent Wall Street scurrying. The company's revenue grew by double digits, and it anticipates another double-digit top-line improvement for the in-progress second quarter, with its guidance midpoint of $129.5 million representing a 17.7% gain over the year-ago period.

The problem lies in Sierra's mediocre bottom-line expectations, but companies in highly competitive high-growth industries -- such as the Internet of Things -- ought to be expected to spend heavily to grow their market share before the industry matures. To that extent, Sierra has been acquiring machine-to-machine (M2M) assets, including In Motion, which produces vehicle-connectivity modules that now put Sierra in direct competition with fleet-management specialist CalAmp (CAMP -4.59%).

CalAmp recently reported an installed base of 3.5 million devices, but since Sierra claims a third of the embedded M2M module market -- far more than any competitor -- it certainly brings the heft necessary to dominate the vehicle market as well. Sierra has also been developing its own M2M platform, Legato, which may very well give it the killer edge over competition if it can achieve a large enough installed base before M2M communications make the leap from a niche to an everyday reality.

Estimates for just when this shift will take place can vary quite a bit. Analysys Mason expects the install base for M2M devices to grow sevenfold over the next decade, from 100 million today to 700 million in 2023. Networking giant Cisco (CSCO -0.52%) is more optimistic, as it predicts that a stunning $19 trillion in new revenue will be generated by the Internet of Things by 2020. Cisco has committed its considerable resources to growing the Internet of Things, which will certainly help Sierra over the long term -- making itself the connector of choice to an Internet of Things powered by Cisco routers and switches will get Sierra a much larger piece of that 700-million-device pie.

Putting the pieces together
Today, Sierra Wireless has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.