On paper there's not much that Sierra Wireless, Inc. (NASDAQ:SWIR) and NVIDIA Corporation (NASDAQ:NVDA) have in common. Sierra makes chips and software to connect industrial equipment, cars, city services, etc., to the internet. This small-cap company is leading the charge for the growing Internet of Things (IoT) market, and its current position should allow it to continue benefiting as this $2 trillion market takes shape.
Meanwhile, NVIDIA has a nearly unbeatable lead in the graphics processing unit (GPU) space right now and has brought share-price returns of about 130% over the past 12 months. Its graphics processors are used in everything from gaming to semi-autonomous vehicles to artificial intelligence (AI) data centers, and its leadership position in all three makes it a compelling buy for any investor.
Both companies have tons of potential, so let's take a closer look at them to determine which one might be the better long-term play.
The case for NVIDIA
Aside from its massive share-price gains, there is tons to like about NVIDIA. It holds an enormous lead over its rival Advanced Micro Devices in the discrete GPU market. AMD currently holds about 30% of the discrete GPU market, while NVIDIA takes up the rest. That's notable not only because of NVIDIA's lead, but also because AMD's recent GPU releases, including the highly anticipated Vega, haven't helped the company catch up to NVIDIA.
That's important because NVIDIA makes the vast majority of its money from selling GPUs for computer gaming. In the fiscal third quarter of 2018, the company brought in $1.5 billion in gaming revenue, which was 59% of its total sales.
If the story ended there, NVIDIA would still be a compelling company -- but that's not even close to the end of its potential. That's because NVIDIA is taking its GPU prowess and transforming itself into a dominant force in artificial intelligence. The company believes its chips have a total addressable market of at least $39 billion between 2020 and 2025. Much of that will come from using its GPUs in AI data centers -- as it's already doing for Facebook, Amazon, and others -- and from driverless cars.
NVIDIA is a leader in autonomous driving technology with its Drive PX Pegasus, the latest iteration of its hardware, which processes the visual information that semi-autonomous vehicles create. The company's GPUs allow cars to understand, and make decisions based on, the data they receive from cameras and sensors. The company already has a handful of semi-autonomous vehicle partnerships and brings in just over 5% of its top line from its automotive business.
NVIDIA is firing on all cylinders: In the fiscal third quarter, the company managed to increase sales by 32% year over year and boost its bottom line by 55% year over year.
Some investors are leery of NVIDIA right now because its shares are trading at 45 times the company's forward earnings. But investors should know that NVIDIA is still at the beginning stages of its GPU story, and as driverless cars and AI continue to develop, the company is in a perfect position to continue benefiting from both.
The case for Sierra Wireless
Sierra's opportunity stems from connecting formerly unconnected things to the internet. Research from Gartner shows that there will be 20 billion things (bikes, thermostats, cars, etc.) connected to the internet by 2020, up from 7 billion this year, and Sierra is right in the thick of it. The company's chips are focused on making nearly any type of industrial equipment, vehicles, parking meters, street lights, energy-management equipment, and a host of other devices and services easier to manage, track, and analyze using the internet. In short, Sierra both connects devices to the internet and provides the necessary software to analyze the data from those connections.
The company is currently a leader in the IoT space and brings in 33% of the global revenue for embedded modules (for connectivity). That's quite a feat for a company with a market cap of just $730 million -- and Sierra is showing no signs of slowing down.
The company's top line ticked up by nearly 13% in the third quarter of 2017 to $173 million, and earnings, at $1.2 million, moved back into positive territory after a loss of $1.8 million in the year-ago quarter. It was a strong quarter for Sierra, and management believes there's even more to look forward to.
Over the summer, the company said it's merging with another IoT company, Numerex. The deal will be voted on in early December and is expected to close shortly thereafter. Sierra will benefit from the deal by adding Numerex's subscription revenue to its strong hardware sales. Subscription revenue is important to Sierra because hardware sales are typically one-off purchases by customers, while subscriptions allow Sierra to both sell the hardware and keep customers paying for the software.
Sierra Wireless CEO Jason Cohenour said in a press release in August: "The acquisition of Numerex accelerates our IoT device-to-cloud strategy by adding an established customer base, significant sales capacity, proven solutions, and recurring revenue scale. The combination of Sierra Wireless and Numerex will represent a powerful business and technology platform that will enable the company to drive a global leadership position in IoT services and solutions."
With the Numerex acquisition -- added to Sierra's already-strong IoT position -- the company should continue to be a solid bet for investors looking for an IoT pure play. Shares are currently trading at about 20 times the company's forward earnings, and Sierra's current IoT lead should only strengthen as this market expands and more devices and equipment are hooked into the internet.
Both of these companies look like great long-term investments and I don't think investors would be disappointed with either one. But I think that NVIDIA is the slightly better buy, if only for the reason that it has so many different opportunities to benefit from. The company is already seeing revenue growth in artificial intelligence, driverless cars, and data centers -- in addition to its strong gaming segment -- and many of these categories are still in their nascent stages. Once AI and autonomous vehicles come into their own, NVIDIA is poised to see those revenues spike.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Facebook, Nvidia, and Sierra Wireless. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.