Please ensure Javascript is enabled for purposes of website accessibility

Sierra Wireless Finally Shifts Into a Higher Gear

By Harsh Chauhan – Aug 20, 2018 at 10:17PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Internet of Things specialist seems to have put its troubles in the past.

Sierra Wireless (SWIR -0.38%) hasn't done much to justify its potential despite being a pure-play Internet of Things (IoT) company. But it looks like things are finally changing for the better. In early August, the IoT specialist posted impressive second-quarter results that arrived at the higher end of Wall Street's expectations, and its outlook was solid enough to boost investor confidence. The chipmaker is on track to post yet another quarter of solid double-digit top-line growth, and it won't be surprising if it sustains this momentum in the long run thanks to the two fast-growing businesses that have been critical to its turnaround.

Icons representing different components of the Internet of Things are shown in a honeycomb design.

Image Source: Getty Images.

What's working?

Sierra's OEM (original equipment manufacturer) solutions business supplied nearly three-fourths of the company's total revenue last quarter, but it grew a modest 4.5% compared to the prior-year period.

Rapid growth in the chipmaker's enterprise solutions and IoT services businesses was the real reason its overall revenue shot up 16.4% year over year to $201.9 million. The company's enterprise solutions revenue increased 41% from last year, while IoT services revenue more than tripled. These two businesses now account for a fourth of Sierra's total revenue, and they look all set to play bigger roles in driving the company's growth.

Sierra is tapping the industrial and automotive markets through its enterprise solutions business. The company's AirLink routers, which are better known as IoT routers, play an important role in enabling machine-to-machine communication in devices that require constant internet connectivity. Not surprisingly, demand for these routers is expected to grow substantially in the future as more devices connect to the internet, with one estimate putting the size of the wireless router market at $16 billion in 2025, compared $8.5 billion last year.

The good part: Sierra is gaining impressive traction here, as its recent design wins suggest. Industrial equipment giant Atlas Copco selected its solutions a few months ago to deploy preventive maintenance in its factories. Sierra's enterprise products are also being deployed by truck fleet operators for vehicle tracking, which is another fast-growing space that's expected to nearly double by 2024 compared to 2016 levels.

On the other hand, Sierra's IoT services business is a play on the growing deployment of IoT devices, which will need software and other related services for managing IoT applications in the cloud. Not surprisingly, half of the company's potential contracts in the services business originate from its other two segments, which is why it carries a strong margin profile -- one that should help the company's margins in the long run.

Gearing up for bottom line growth

Sierra's non-GAAP gross margin was almost flat last quarter at 34.4%, but it shouldn't be long before it goes up a few notches thanks to the superior margin profile of its two growing businesses. The enterprise solutions business, for instance, reported 50% non-GAAP gross margin last quarter, while that of IoT services stood at 41.1%.

In fact, the gross margins of both these businesses segments easily eclipse that of the OEM solutions business' gross margin of 30.4%. So, as the enterprise and the IoT services businesses gain more clout at Sierra Wireless, they should be able to boost the company's earnings. This is probably why analysts expect Sierra's earnings to grow in the high teens for the next five years, which makes it a nice bet given that it is trading at 15 times forward earnings.

What's more, investors can expect the OEM solutions business to pick up the pace starting in 2019 when its contract with Volkswagen kicks in. So Sierra Wireless investors can be confident that the company can now clock higher growth rates after enduring tough times over the past couple of years.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Sierra Wireless. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sierra Wireless Stock Quote
Sierra Wireless
$29.09 (-0.38%) $0.11
Volkswagen AG (ADR) Stock Quote
Volkswagen AG (ADR)
$18.93 (1.39%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.