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Better Buy: Sierra Wireless vs. Qualcomm

By Chris Neiger – Apr 6, 2017 at 3:14PM

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These two tech companies are leaders in their respective markets -- but which is the better long-term play?

Sierra Wireless (SWIR) and Qualcomm (QCOM -1.33%) are fighting separate battles in the tech space. Sierra's pure-play on the Internet of Things (IoT) has lots of possibilities but has proven to be a volatile stock at times. Meanwhile, Qualcomm's leadership in the mobile space appears to be solid, but the company is fraught with patent litigation problems and is itself looking to the IoT as one of its possible next steps for more opportunities.

Let's take a closer look at both companies and what they have to offer investors.

Picture of stock arrows going up and down.

Image source: Getty Images.

The case for Qualcomm

Qualcomm is one of the biggest forces in the mobile applications processor space, snatching up 39% of global market share in the first half of 2016.

One key negative for Qualcomm is its seemingly never-ending legal troubles with its patent licensing business. The company enjoys patent licensing fees stemming from its 3G and 4G patents, which many tech companies around the world have to pay to use. The company made one-third of its 2016 revenue from its patent licenses, but a legal bout with China last year left Qualcomm forking over $975 million in fines to the Chinese government.

The problems haven't ended there, either; Apple is suing Qualcomm for $1 billion because of patent license issues, and the European Union and South Korea have their own suits as well. It's still unclear how long this will affect the company, but for now, investors have been worried that it doesn't bode well for Qualcomm's business.  

QCOM Chart

On a brighter note, Qualcomm made a bid late last year to purchase NXP Semiconductors (NXPI -1.14%), which will place the company firmly in the driverless car space once the deal closes. NXP debuted its Blubox semi-autonous driving system last year and says that by 2021, it will bring Level 4 automation (hardly any driver interaction) by 2021. The roughly $47 billion deal is a hefty one, but it's likely a smart move as Qualcomm looks beyond the mobile market and its patent licensing fees and toward the company's next big iteration.

The case for Sierra Wireless

Sierra Wireless makes embedded wireless modules that allow its customers to connect their devices to the Internet as part of the broader Internet of Things (IoT). Despite its small-cap size of just $687 million, the company is a leader in the embedded module market and brings in about 33% of all global embedded module revenue. 

The company grew revenues by 12.5% year over year in Q4 2016, and earnings per share spiked from $0.08 in Q4 2015 to $0.27 in the recent quarter. That growth came from the company's ability to grow revenues across all of its key business segments.

Additionally, Sierra is trying to better position itself for future growth by focusing on recurring revenue streams like cloud-based services solutions. 

SWIR Chart

However, current Sierra investors are already well acquainted with the volatility of this stock. The company's share price is up about 68% year to date, but that's following a 1% decrease in all of 2016. Sierra's opportunity to benefit from IoT is there, but investors should keep in mind that this small tech player is making a huge bet on a new market, and that's likely to cause some instability. 

The verdict: Buy Qualcomm

Between the two companies, I think Qualcomm has the potential for more stable growth over the coming years. Qualcomm certainly has its share of problems right now, but if can emerge from its litigation woes, continue its strong presence in mobile, and transition to the broader (and potentially lucrative) IoT market, then I think it could ultimately remain a winner for investors. 

That's not to say Sierra Wireless doesn't have lots of potential, because it certainly does. But the company is more unstable than Qualcomm because of its size and its winner-take-all bet on the burgeoning Internet of Things market. For that reason, I'd have to say Qualcomm is the safer bet. 

Chris Neiger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Qualcomm and Sierra Wireless. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.

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