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Is Sierra Wireless a Buy Going Into Q3 Earnings?

By Harsh Chauhan – Nov 5, 2018 at 7:31PM

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The IoT specialist can buck the bearish trend with a solid report.

Pessimism surrounding the broader semiconductor market has swept up Sierra Wireless (SWIR 0.03%) in its wake as shares of the chipmaker are now trading close to their 52-week lows. That's a stark contrast to three months ago, when the Internet of Things (IoT) specialist reported a set of solid second-quarter results that sent the stock up 19%.

But much water has flowed under the bridge since then. Though global chip sales are still rising, the growth is tapering off. Global sales increased nearly 14% annually last quarter, but for the month of September, the increase was a paltry 2%. Investors fear a potential semiconductor oversupply and that's why Sierra Wireless stock has dropped in recent months despite showing that it is on track to make a big dent in the IoT market.

But investors need to realize that Sierra plies its trade in a market that's still in its early phases of growth, and an expected strong third-quarter report on Nov. 8 should bring this point home.

A man standing in front of a wall on which are drawn question marks.

Image source: Getty Images.

Beating the slowdown

For a long time, Sierra Wireless witnessed tepid top-line growth as its IoT catalysts weren't materializing. However, all that has changed over the past couple of quarters. The chipmaker's growth rates are finally looking up thanks to a spate of new design wins and the deployment of its products and solutions by customers.

That's why the company's outlook for the recently concluded third quarter is strong. The company expects $0.26 per share in adjusted earnings on $202.5 million in revenue at the midpoint of its guidance range. Assuming that Sierra hits these estimates, its top line would increase nearly 17% annually.

That would provide clear evidence that Sierra Wireless can keep growing at an impressive pace despite the perceived slowdown in the broader semiconductor industry. A solid outlook from the chipmaker should establish the fact that the IoT catalyst will help it overcome any short-term hiccups and pave the way for long-term growth.

Stepping on the gas

Sierra Wireless' growth should pick up the pace in subsequent quarters as its partnerships are moving from the handshake to the deployment phase. The original equipment manufacturer (OEM) business that supplies more than 70% of its total revenue will benefit from the initial shipments of the company's low-power wide-area (LPWA) network modules.

KDDI, a Japanese telecom provider, was supposed to start deploying Sierra's LPWA network modules from the middle of 2018. Sierra recently confirmed that its LPWA modules are now certified to operate on KDDI's network in Japan, paving the way for their deployment by customers looking to scale up their IoT infrastructure.

U.S. telecom giant AT&T has also certified the chipmaker's LPWA modules for deployment on its own network. This is a positive development for Sierra, as Machina Research estimates the number of LPWA connections will jump from just 59 million in 2016 to 3 billion by 2025. Now that Sierra has an early start in this market  -- thanks to its partnerships with leading telecom players in Japan and in the U.S. -- it is in a nice position to take advantage of this lucrative opportunity.

And Volkswagen will start using Sierra's connectivity modules in its cars from next year as part of an earlier partnership between the two companies.

In all, Sierra Wireless is sitting on some attractive catalysts that will start materializing sooner rather than later. As such, it won't be surprising if Sierra exceeds the 15% annual earnings growth that's currently expected of it.

Finally, Sierra has a P/E of just 22 as compared with its five-year average of nearly 104. This makes the company a nice bet going into the third-quarter earnings report in light of the beating that it has taken because of the broader semiconductor industry weakness.

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.

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