Sierra Wireless (NASDAQ:SWIR) is the world's top manufacturer of embedded machine-to-machine (M2M) modules and gateways. Its leading positions in those markets, which it repeatedly expanded via acquisitions, once made it a top player in the growing Internet of Things (IoT) market.

However, Sierra's stock plunged nearly 80% over the past five years as its growth decelerated and macro headwinds dampened its outlook. Will Sierra Wireless recover over the next five years, or will its stock drop further to the low single digits?

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Why did Sierra slide over the past five years?

Sierra's growth decelerated significantly between 2014 and 2016. It returned to growth in 2017 and 2018, but much of that growth came from its acquisition of Numerex, a producer of fully integrated device-to-cloud IoT solutions, at the end of 2017.

YOY growth

2014

2015

2016

2017

2018

Revenue

24%

11%

1%

12%

15%

Adjusted EBITDA

89%

21%

2%

23%

2%

YOY = Year-over-year. Source: Sierra Wireless annual reports.

Sierra's growth after lapping that acquisition was unimpressive. Its total revenue fell 9% annually in the first nine months of 2019, while its adjusted EBITDA declined 54%. For the full year, it expects its revenue and adjusted EBITDA to decline 10% and 59%, respectively.

Sierra is struggling to grow both its IoT solutions module and enterprise broadband businesses, which accounted for 54% and 46% of its revenue, respectively, last quarter.

Sierra notes that its IoT customers are buying fewer 2G and 3G embedded modules as they prepare to buy newer LPWA (low-power wide-area network) and 4G/5G modules instead and that it's seeing softer demand from the security and energy markets. Declining sales of those core modules offset its growth in higher-margin gateways and subscription services last quarter.

Its enterprise broadband revenue also tumbled as macro headwinds throttled its sales of high-speed cellular modules to the mobile computing, networking, and automotive markets. Sierra also noted during last quarter's conference call with analysts that one of its major auto customers, Volkswagen, delayed the launch of several new connected vehicle platforms.

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What's Sierra's game plan for the next five years?

Sierra's main turnaround strategy, which was introduced after CEO Kent Thexton took the helm last October, focuses on cutting costs, reinvesting savings into the development of new 5G and LPWA modules, and expanding its subscription services.

Sierra expects its "annualized recurring revenue" to hit $200 million by the middle of 2022 and double to $400 million by the middle of 2024. Sierra doesn't disclose that exact figure separately right now, but its total "subscription, support, and other" revenue hit $72.6 million in the first nine months of 2019.

Sierra's forecast for the fourth quarter suggests that figure will hit about $100 million for the full year, or 14% of its top line. Last quarter, Sierra noted that the cumulative value of all its recurring service wins in the first nine months of 2019 was 170% higher than the value of all its wins in 2018, which indicates its transformation from a hardware company into an all-in-one service provider for IoT devices is paying off.

Based on those growth rates, Sierra's higher-margin annualized recurring revenue could account for 20%-30% of its sales within the next five years. That shift will boost its overall margins and lock in more customers. Meanwhile, fresh demand for 5G and LPWA upgrades -- as well as rebounding demand across the automotive, mobile, and enterprise networking markets -- could boost its revenue again.

Simply put, Sierra has struggled over the past few years, and its growth cycle was clouded by several acquisitions, strategic shifts, and macro challenges. However, it's arguably well-positioned to grow again over the next five years as fresh connectivity standards hit the market.

Reevaluating the IoT market

At the beginning of the decade, bullish forecasts for the IoT market lifted Sierra's stock. However, many of those estimates glossed over the fact that many M2M and IoT modules are lower-margin products which are merely fragments of larger ecosystems.

Sierra is addressing the issue with its integration of Numerex's integrated solutions and the expansion of its end-to-end subscription services, and analysts expect those improvements to boost its annual earnings by an average rate of 12% over the next five years. Therefore, Sierra's downside potential seems limited right now, and its growth rates could improve significantly and lift the stock off its multi-year lows.