Shares of Sierra Wireless (NASDAQ:SWIR) have fallen nearly 40% over the past 12 months, even though the Internet of Things (IoT) solutions provider soundly beat analyst expectations for the past seven quarters. Let's see why investors are dumping Sierra, and whether or not the stock can bounce back this year.

What does Sierra Wireless do?

Sierra Wireless sells 2G, 3G, and 4G embedded modules and gateways, which are used for machine-to-machine (M2M) communications. It controls about a third of the global market for M2M modules, according to ABI Research, and is often cited as a "pure play" on the growing IoT market.

A graphical representation of the Internet of Things.

Image source: Getty Images.

Sierra repeatedly expanded by buying smaller wireless hardware companies, which diversifies its portfolio, increases its scale, and boosts its bundling power. Its recent acquisitions include AnyData, Maingate, Mobiquithings, GenX Mobile, Numerex, and GlobalTop Technology's GNSS (global navigation satellite system) unit.

How fast is Sierra Wireless growing?

Sierra posted double-digit revenue growth over the past five quarters thanks to broad-based demand for its modules across the OEM, Enterprise, and IoT markets. Those three core business units all posted solid growth over the past year.

Business Unit

Q1 2017

Q2 2017

Q3 2017

Q4 2017

OEM

10%

9%

8.4%

3.4%

Enterprise

44.8%

30.7%

38.8%

52%

IoT*

2.1%

4.3%

23%

73.5%

Total

13.3%

11.1%

12.8%

12.6%

YOY revenue growth. Source: Sierra Wireless quarterly reports. *Formerly known as "Cloud and Connectivity Services"

Sierra's revenues rose 13% annually to $183.5 million last quarter, beating estimates by more than $6 million, but its OEM revenue growth has been decelerating. That's troubling, since OEM revenues accounted for 76% of Sierra's top line during the quarter, and remains the most cyclical part of its business.

During the company's conference call, CEO Jason Cohenour stated that Sierra's OEM design wins remained "solid" across the "automotive, networking, transportation, energy and mobile computing" industries. Cohenour also declared that Sierra "secured the second largest design win in the company's history with a large international automotive customer," and expected those shipments to start in late 2019. However, Sierra's focus on the automotive industry is a double-edged sword, since global auto sales are expected to decelerate this year.

Meanwhile, Sierra's surge in IoT revenues was attributed to its acquisition of M2M enterprise solutions provider Numerex last December. The $107 million acquisition made strategic sense, since it would improve its IoT device-to-cloud capabilities, but its integration will also weigh down Sierra's operating margins.

Concerns about earnings growth

Sierra's non-GAAP gross margin fell 50 basis points annually to 33.8% last quarter, but rose 40 basis points from the third quarter.

However, higher operating costs caused its non-GAAP operating income to fall 19% annually to $9.5 million. But Sierra's net earnings still rose 4% to $9.2 million, or $0.28 per share, which beat estimates by three cents.

A graphical representation of the Internet of Things.

Image source: Getty Images.

For the first quarter, Sierra anticipates 12%-17% year-over-year sales growth, which easily beats expectations for 10% growth.

But on the bottom line, it expects a 58%-83% drop in earnings -- which was well below expectations for a 17% decline.

Sierra attributes the stunning drop to "unusual non-recurring items," including its integration of Numerex, which is upgrading its network and migrating customers, and "significant" component supply shortages. It expects those higher costs to be exacerbated by "typically seasonal higher" operating costs during the first quarter.

As a result, analysts expect Sierra's revenue to rise 14% this year, but for its earnings to tumble 14%. But after those headwinds fade, they see Sierra's revenue and earnings rising 9% and 38%, respectively, next year.

But the valuations look attractive

Sierra was a fairly expensive stock over the past few years. But the stock now trades at just 19 times its 2018 earnings estimate, and 14 times its estimate for 2019.

Those multiples are surprisingly comparable to Cisco's (NASDAQ:CSCO), which trades at 18 times this year's earnings estimate and 16 times next year's estimate. Yet Sierra, once it moves past these near-term headwinds, has much higher growth rates than Cisco.

Speaking of Cisco, Sierra -- which has an enterprise value of just over $500 million -- could also be a tempting buyout target for the networking giant, which has been expanding its IoT presence via the acquisitions of companies like Jasper Technologies.

The verdict: Buy the dip

The market has clearly fallen out of love with Sierra, but the company is still firing on all cylinders. Its Enterprise and IoT growth should offset a slowdown in OEM revenues (if that occurs), while its integration of Numerex should widen its moat against its smaller rivals. So if you were waiting for Sierra to finally become too cheap to ignore, this could be a great time to buy.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Sierra Wireless. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.