Shares of Sierra Wireless (NASDAQ:SWIR) hit a rough patch after the company announced in early August that it will be acquiring enterprise-solutions provider Numerex in a stock-for-stock transaction worth $107 million. The resulting dilution has hurt the Internet of Things (IoT) specialist's stock price in recent months in spite of a strong showing in the second quarter.
However, the acquisition now seems to be priced in to Sierra's stock after a 24% drop in market capitalization over the past three months. Investors will now be looking for a fresh set of catalysts in the company's upcoming third-quarter earnings report that's due after the market closes on Nov. 2. But will Sierra give investors reasons to celebrate? Let's take a look.
The headline numbers
Wall Street expects Sierra's revenue to grow 10.8% year over year to $170 million. Its earnings are expected to jump to $0.21 per share from the prior-year period's $0.13 per share. Both numbers are in line with the company's guidance.
However, as fellow Motley Fool writer Steve Symington has pointed out, Sierra might have low-balled third-quarter expectations deliberately with the intention of over-delivering. This seems likely as Sierra management had said in the previous conference call that one of its high-volume automotive customers would transition to a next-generation platform, which could result in increased revenue.
And Sierra Wireless' acquisitions of Flow Search and Numerex could have a positive impact. This is because potential customers are now aware that the chipmaker has strengthened its expertise in the device-to-cloud solutions market, as well as edge cloud computing. So Sierra's existing customers could be lining up to buy more services and chips from the company, and this could result in a stronger-than-expected fourth-quarter outlook.
But investors shouldn't judge Sierra just on the basis of a single quarterly report. The company has been pulling the right strings to take advantage of the potentially fertile Internet of Things space.
Looking at the long run
Sierra Wireless has been trying to target fast-growing end markets. For instance, the company recently announced that it has added a host of new features to its embedded vehicle routers to deliver advanced telemetry and connectivity solutions to fleet customers.
The new update to the AirLink advanced vehicle router enables fleet operators to manage their fleet by monitoring all the vehicle data from a single screen. This could help Sierra cut its teeth into the commercial vehicle telematics market that's expected to clock 20% annual growth through 2022, hitting $18 billion in size, according to Markets and Markets.
More importantly, Sierra is already a known name in the vehicle connectivity space thanks to its Volkswagen relationship. The German automaker had announced earlier in 2017 that it will use Sierra's 4G LTE embedded modules to enable connectivity in its vehicles starting next year. This contract is a big deal for the chipmaker because Volkswagen sold over 10 million vehicles last year.
Meanwhile, Sierra's recent acquisitions indicate that it is trying to add diversity to its top line. For instance, the acquisition of Flow Search's FlowThings edge and cloud platform has given the chipmaker an entry into the fast-growing edge computing market.
Edge computing is fast gaining traction because it involves data processing at the source instead of the cloud. This reduces the reaction time and the cost of operating IoT devices, so Sierra has done the right thing by bolstering its expertise in this space as sales of edge computing hardware could increase from $4.3 billion this year to more than $7 billion by 2022, as per Transparency Market Research.
The Numerex acquisition should prove fruitful for Sierra in the long run thanks to the former's superior margins. Numerex gets 91% of its total revenue from the subscription and support business, which has a gross margin rate of 57%. This compares favorably to Sierra's 34.5% gross margin last quarter.
Therefore, investors should be checking Sierra's upcoming results to glean more insights about the adoption of its products and services and how the Numerex acquisition is progressing.