There have been plenty of opportunities for investors in the world of technology over the years. Finding the next big winners is all about identifying those industries that will supply a worldwide need in the future. Who wouldn't have liked to buy Intel or Microsoft before the widespread adoption of the PC in the 1990s?

Looking ahead, the growth of wireless devices, the development of self-driving cars, and the growing need for data centers to process all of the data people accumulate online could be fertile grounds to explore for great investments for the coming decades.

Sierra Wireless (NASDAQ:SWIR) and NVIDIA (NASDAQ:NVDA) are two companies on the front line of these emerging growth opportunities. We'll compare both companies' recent performance, future expectations, and valuation to determine which is the better buy for investors today.

Computer chip with brightly lit lines expanding out across a circuit board.


Sierra is connecting everything together

Sierra Wireless is a relatively small company with a market cap of $692 million. It manufactures wireless communication equipment for markets ranging from mobile payments, self-driving cars, and home security to infrastructure needs for the energy sector. Sierra has a tremendous long-term growth opportunity in the Internet of Things (IoT) market, which the company estimates to be a $30 billion addressable market -- multiples larger than Sierra's annual revenue shown in this table. 

Segment TTM as of Q2 2018 2017 2016 2015
OEM $565 $556 $517 $523
Enterprise $116 $102 $71 $63
IoT $65 $35 $28 $21
Total revenue $746 $692 $616 $608
Net income ($22) $4 $15 ($3)

Data source:Sierra. Amounts in millions. TTM = Trailing 12-month.

However, Sierra has struggled to deliver the growth many investors have come to expect, given the tremendous market opportunity in wireless connectivity and IoT. A primary reason for this is the obstacles companies have to go through to set up an IoT network. It requires working with several vendors to set up a complex IoT platform spanning security, cellular connectivity, cloud service, over-the-air update systems, databases, and many other things. A study by Gartner concluded that about 75% of IoT projects will take up to twice as long to plan through 2018. 

Sierra's strategy has been to use acquisitions to put together a complete end-to-end solution and thereby take a leading position in the IoT market. One of the more notable transactions lately was the acquisition of Numerex, which bolstered Sierra's device-to-cloud strategy in the enterprise solutions market. Numerex offers a suite of IoT solutions for smart devices, network connectivity, and service applications.  

But the stock has fallen about 11% over the last year as additional costs to integrate Numerex, as well as a component supply shortage during the first quarter in Sierra's largest segment (OEM), has weighed on the bottom line. While revenue was up 16% year over year for the first half of 2018, higher costs caused a net loss of $0.55 per share compared to a net profit of $0.20 in the year-ago period.

Recently, Sierra's smaller segments have been showing a lot of promise, where enterprise solutions revenue jumped 31% year over year in the second quarter and the inclusion of Numerex boosted revenue in the IoT segment by 210%. Across both segments, Sierra gained several customer wins in the quarter including energy, transportation, public safety, and industrial. 

The stock currently trades at a forward P/E of 15 times analysts' consensus earnings estimates, which is not expensive if Sierra can show consistent growth from here. 

NVIDIA is powering the computers of tomorrow

On the other side, NVIDIA has delivered incredible returns for investors of more than 2,000% over the last decade. That massive return brings NVIDIA's market cap to $168 billion. 

Driving these gains has been the graphics chip maker's success expanding its core graphics processing technology, originally designed for PC gaming, to the broader world of high-performance computing, such as massive data centers and the growing adoption of deep learning to process the increasing amount of data the world is accumulating. The company has also gained numerous automotive partners by supplying its chips to the self-driving car market.

Segment TTM as of Q2 2019 2018 2017 2016
Gaming $6.828 $5.513 $4.060 $2.818
Data center $2.568 $1.932 $0.830 $0.339
Automotive $0.582 $0.558 $0.487 $0.320
Other $1.899 $1.711 $1.533 $1.533
Total revenue $11.877 $9.714 $6.910 $5.010
Net income $4.301 $3.047 $1.666 $0.614

Data source: NVIDIA. Amounts in billions. TTM = Trailing 12-month.

In the second quarter, NVIDIA posted revenue growth of 40% year over year. CEO Jensen Huang said, "Fueling our growth is the widening gap between demand for computing across every industry and the limits reached by traditional computing. Developers are jumping on the GPU-accelerated computing model that we pioneered for the boost they need."

Leading cloud providers, including, Alibaba Group Holding, and Alphabet, are using NVIDIA's GPUs to power their data centers. NVIDIA also has partnerships with major car makers, including Toyota Motor and Tesla, to use its DRIVE PX computer for self-driving cars. 

But NVIDIA's bread-and-butter business still involves selling graphics cards to PC gamers, which represents 57% of its annual revenue and grew 52% year over year in the second quarter. Driving growth in this segment has been the adoption of high-end gaming GPUs to power high-resolution monitors, as well as the growing popularity of multiplayer gaming, in which gamers need the best hardware to compete effectively.

The sales shift to pricey, high-end GPUs has been game changing for NVIDIA's margins. Between fiscal 2015 and fiscal 2018, gross margin expanded 4.4 percentage points to 60.2%. In the last quarter, NVIDIA's earnings per share jumped 91% year over year as a result of expanding margins. 

High growth comes at a price, unfortunately. At a forward earnings multiple of 35, NVIDIA's stock is more expensive than Sierra's, although this isn't necessarily a deal breaker. In order to justify that higher multiple, NVIDIA will need to continue posting high growth rates in revenue and earnings going forward. This is very possible given that the combined market for data center and self-driving cars represents an addressable market of $110 billion. 

Which is the better buy?

Both companies have something to offer investors looking for big long-term growth potential. It's a close call, especially because Sierra offers a modest valuation of just 15 times forward earnings estimates. But I tend to lean away from companies that don't have a proven record of consistent, profitable growth. In my experience, paying up for a company that has already proven itself tends to lead to better results over time.

Sierra's acquisition strategy has positioned it well in the IoT market, but the company has yet to prove it can deliver consistent double-digit growth every year where it really counts -- on the bottom line. On top of that, Sierra faces competition from larger companies like Cisco Systems with greater financial resources, which may add to the IoT provider's difficulty in establishing a more stable future growth path.

On the other hand, NVIDIA has already been winning big in the gaming and data center markets and is very well positioned in the driverless car market. Additionally, NVIDIA's consistency in generating positive earnings has allowed management to return $1.25 billion in capital to shareholders every year in the form of dividends and share repurchases. 

For these reasons, I think NVIDIA is the better buy for investors today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.