Sierra Wireless (NASDAQ:SWIR) is often mentioned as a "pure play" on the Internet of Things (IoT), which connects billions of devices to each other and the internet via the cloud. That's because it's the world's largest manufacturer of 2G, 3G, and 4G embedded modules and gateways -- which are essential for M2M (machine-to-machine) communications.

Sierra doesn't have a reputation for being a "millionaire-maker" stock for long-term shareholders. Cyclical demand for M2M modules has sent the stock through some volatile peaks and troughs, and the stock has fallen roughly 8% over the past 10 years. However, some Sierra bulls believe that the growth of the IoT market over the next few years could propel the stock to fresh highs. Are they right? Let's take a look.

A cityscape at night with blue connected circles representing things connected to the cloud.

Image source: Getty Images.

Cisco sees the number of internet-connected devices doubling from 25 billion to 50 billion between 2015 and 2020. Research firm Markets and Markets expects the IoT market to grow from $171 billion this year to $562 billion by 2022.

So as the leading pure play in this growing market, could Sierra break out of its cyclical rut and become a long-term "millionaire-maker" stock?

Evaluating Sierra's recent growth

The long-term path of Sierra's stock hasn't been super, but the stock was kinder to investors who bought in more recently. Thanks to bullish forecasts for the IoT market, the stock has rallied more than 150% over the past five years.

However, throughout 2016, Sierra's revenue growth was weighed down by the weakness of its core business with OEMs (original equipment manufacturers), which contributed 84% of revenue last year. However, OEM demand rebounded in the fourth quarter of 2016, and improved considerably throughout the first half of 2017.

 Metric

Q2 2016

Q3 2016

Q4 2016

Q1 2017

Q2 2017

OEM sales growth (YOY)

(4%)

(2%)

11.2%

10%

9%

% of Sierra's revenue

85%

83%

83%

82%

83%

YOY = year-over-year. Source: Sierra Wireless.

Sierra attributes that recovery to robust demand for its modules in the automotive, energy, networking, payment, and mobile computing markets. Its acquisition of the assets of GlobalTop Technology's GNSS (global navigation satellite system) business, which closed earlier this year, further strengthened the OEM business. Its smaller enterprise solutions unit also posted double-digit sales growth over the past several quarters.

Sierra's gross margins have also been expanding, partly fueled by its acquisitions of smaller wireless players (AnyData, Maingate, Mobiquithings, and GenX Mobile) over the past few years.

SWIR Gross Profit Margin (TTM) Chart

Source: YCharts

That expansion, which scaled up Sierra's operations, counters a common bearish argument that cheaper M2M module makers, particularly from China, could throttle its earnings growth.

As a result, analysts expect Sierra's revenue and earnings to respectively rise 11% and 47% this year, followed by 10% revenue growth and 14% earnings growth next year. Those numbers sound solid, but they don't indicate that Sierra's stock will deliver multibagger returns anytime soon.

The problems with Sierra Wireless

Sierra's expected growth looks decent, but its valuation looks frothy. The stock trades at 34 times earnings, which is slightly higher than the industry average price-to-earnings ratio of 33 for communication equipment makers. However, its forward P/E of 18 looks more reasonable -- if Sierra meets earnings expectations.

The other issue is that Sierra's growth potential is heavily tied to bullish forecasts for the IoT market. If the recent outbreak of hacks and data breaches discourages companies and consumers from connecting devices to the IoT, current industry forecasts could miss the mark.

However, Sierra Wireless remains a lucrative buyout target. It has a clean balance sheet and a fairly low market cap of about $700 million. A logical suitor is Qualcomm, which already holds cross-licensing partnerships with Sierra and has been aggressively expanding into the IoT market with the acquisitions of CSR and NXP Semiconductors. However, buying a stock in hopes of the company being bought would be a foolish move, as it might never happen.

So is Sierra Wireless a "millionaire-maker" stock?

Sierra shouldn't be considered a "millionaire-maker" stock since it isn't a young company with multibagger growth potential. Instead, it's a niche chipmaker which might break out of its multiyear M2M cycles as the IoT market grows.

If all goes well, shares of Sierra could possibly double over the next few years or get acquired by a bigger chipmaker. However, investors looking for higher-growth plays should probably look elsewhere.

Leo Sun owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Sierra Wireless. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Cisco Systems and NXP Semiconductors. The Motley Fool has a disclosure policy.