Sierra Wireless (SWIR) and Cisco (CSCO -1.06%) are both major players in the growing Internet of Things (IoT) market, which consists of myriad devices connected to each other and the cloud. Sierra is the largest maker of 2G, 3G, and 4G embedded modules and gateways in the world, and Cisco is its biggest producer of networking routers and switches.

But over the past 12 months, Sierra's shares declined about 25%, while Cisco's rallied nearly 20% to a 52-week high. Let's discuss why the two stocks diverged, and whether those trends will continue throughout 2019.

Network connections across a city.

Image source: Getty Images.

A tale of two IoT stocks

Sierra became the dominant player in M2M (machine-to-machine) modules by acquiring a long list of smaller wireless companies. Sierra splits its businesses into three core divisions: OEM, enterprise, and IoT solutions, which generated 74%, 15%, and 11%, respectively, of its revenue during the fourth quarter.

The year-over-year growth of all three businesses decelerated during the fourth quarter, as its OEM revenue rose 6% annually, its enterprise revenue dipped 5%, and its IoT revenue climbed 89% -- compared to triple-digit growth in the previous three quarters.

The rapid growth of Sierra's IoT business can be attributed to its acquisition of M2M enterprise solutions provider Numerex at the end of 2017. That growth partly offset sluggish demand for its enterprise modules, but a growing list of headwinds -- including its exposure to the soft automotive sector, a loss of market share in the networking and PC markets, and tariffs on Chinese components -- all caused its growth to significantly slow down in the fourth quarter:

Metric Q1 2018 Q2 2018 Q3 2018 Q4 2018
Revenue 16% 16% 18% 10%
Non-GAAP EPS (63%) (10%) 21% (11%)

Year-over-year growth. EPS = earnings per share. Data source: Sierra Wireless quarterly reports.

Servers in a data center.

Image source: Getty Images.

Cisco's router and switch divisions were once slow-growth businesses, but demand warmed up in recent quarters on big enterprise campus upgrades. Cisco also diversified its business by acquiring more companies to strengthen its higher-growth applications and security units. It also generates less than 2% of its sales from China, so it's better insulated from trade tensions than Sierra.

Check out the latest earnings call transcripts for Sierra Wireless and Cisco.

Bundling together its hardware and software products widens Cisco's moat against its competitors and boosts its revenue per customer. Last quarter, 75% of Cisco's revenue came from its products division and the remaining 25% from services.

Seventy-seven percent of Cisco's Products revenue came from its Infrastructure Products (routers, switches, wireless hardware, and other products) during the quarter, 16% came from Applications, and the remaining 7% came from its Security products. Those businesses fired on all cylinders over the past year, enabling Cisco to generate impressive revenue and earnings growth for a 34-year-old company:

Metric Q3 2018 Q4 2018 Q1 2019 Q2 2019
Revenue 4% 6% 8% 7%
Non-GAAP EPS 10% 15% 23% 16%

Year-over-year growth. Data source: Cisco quarterly reports.

Growth forecasts, valuations, and dividends

Sierra's main turnaround plan is to cut costs by up to $50 million this year and reinvest that cash into the development of next-gen 5G and LPWA (low-power wide-area network) modules. However, analysts still expect Sierra's revenue to dip 1% this year and for its non-GAAP EPS to tumble 67% before returning to positive territory next year. Those are dismal growth rates for a stock that trades at over 40 times this year's earnings.

Cisco expects to keep riding its aforementioned tailwinds throughout 2019, and it still has nearly $10 billion in cash to spend on buybacks, dividends, and acquisitions. Analysts expect Cisco's revenue and non-GAAP earnings to rise 5% and 18%, respectively, this year -- which are solid growth rates for a stock that trades at 17 times this year's earnings.

Sierra doesn't pay a dividend, but Cisco pays a forward dividend yield of 2.7%. Cisco has hiked that payout for eight straight years.

The obvious winner: Cisco

Sierra's business should stabilize and improve after it launches new 5G and LPWA modules, but its stock looks expensive and lacks a dividend or any near-term catalysts. Cisco has more irons in the fire, it pays a decent dividend, and the stock is cheap relative to its earnings growth -- so it's a better overall play than Sierra on the growing IoT market.