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Is Sierra Wireless Inc. Stock a Buy After Earnings?

By Tim Brugger - May 24, 2016 at 4:54PM

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After reporting better-than-expected Q1 earnings, the wireless solutions provider’s stock is up over 30%, but is it too late to get on board?

At first glance, it seemed mobile connectivity upstart Sierra Wireless' (SWIR -3.42%) 2016 first-quarter financials left a bit to be desired. Revenue was down, led by Sierra's original equipment manufacturer (OEM) unit's 9% drop in sales to $120.88 million, compared to $133 million a year ago. That's significant, given Sierra generates the vast majority of its revenue -- about 85% -- from its OEM solutions division.

Sierra's quarter didn't faze investors, however: Its stock is up over 30% since sharing first-quarter earnings May 5. That may seem like a contradiction, but there's some method to Sierra's rapid share price ascent madness. The questions are, why did investors react so positively to what were seemingly poor financial results, and is it too late to consider Sierra stock as a legitimate growth opportunity?

Just the facts

Initially, it seemed Sierra's stock price popped thanks to demolishing vaunted analyst Q1 estimates. The Street had expected Sierra to post non-GAAP (excluding one-time items) earnings per share of just $0.01. But thanks to CEO Jason Cohenour's expense-management efforts and strength in the company's budding enterprise and cloud and connectivity units, margins improved year over year, and Sierra posted non-GAAP EPS of $0.08.

On the revenue front, pundits had expected $139.85 million in Sierra's first quarter but were once again pleasantly surprised with its $142.8 million in sales. Beating expectations is often all it takes to jump-start a company's stock price, and if that was all that drove Sierra's 30%-plus stock price pop, it would be concerning since those increases often have as much to do with investor momentum as with fundamentals.

But Sierra has a couple more aces up its sleeve that not only warrant its current share price but offer investors with a measure of risk tolerance a sound long-term growth opportunity. Why? Based on its guidance for Q2 and 2016, Sierra should hit its stride once again this quarter with revenue in the $150 million to $160 million range and non-GAAP EPS of between $0.09 and $0.17 -- both of which would exceed the Street's expectations on the high end of its forecasts.

Expectations aside, Sierra's emphasis on becoming an Internet of Things (IoT) powerhouse is beginning to take hold, and for a company of its size -- its market capitalization is about $618 million -- it doesn't take much to move the needle.

Image source: Sierra Wireless.

Opportunity knocks

Estimates vary, but virtually everyone agrees that IoT will become a huge market in the coming years. One study suggests that there will be as many as 34 billion IoT "things" installed by 2020, generating an astounding $6 trillion in revenue. And many of those devices will be monitored and managed via a mobile device -- which is right up Sierra's alley.

Naturally, with so much at stake, Sierra is going head-to-head with some of the industry's biggest connectivity IoT hitters, including Cisco (NASDAQ: CSCO). Cisco's suite of IoT solutions includes wireless, data center, and security, all of which grew again last quarter. But with $12 billion in quarterly revenue, Cisco needs to make a sizable dent in IoT and related markets to make an impact on its top line. Sierra? Not so much, and it's already beginning to make some headway.

Beyond beating expectations and sharing stellar guidance, one of the key takeaways from Sierra's Q1 was the performance of its cloud and connectivity services division, and to a lesser extent enterprise sales. Though cloud and connectivity -- home of much of Sierra's IoT-related sales -- totaled "just" $6.93 million in revenue last quarter, it was a whopping 92% increase over the year-ago period.

Enterprise revenue improved as well, to the tune of 9%. It was $15 million in Q1, up from $13.76 million last year. With over 100 million IoT devices already shipped and cutting-edge connectivity technologies like its recent unveiling of "the world's fastest vehicle network" for first responders, Sierra is poised for substantial growth.

So-so Q1 earnings and a recent share price run-up of 30% may scare some growth investors off, but don't be alarmed. Sierra Wireless and its burgeoning IoT results still warrant a buy recommendation.

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