Please ensure Javascript is enabled for purposes of website accessibility

Is It Safe to Buy Sierra Wireless Stock After Its Post-Earnings Plunge?

By Leo Sun - Feb 19, 2020 at 9:00AM

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 wireless and IoT modules maker is still struggling to overcome its macro and micro headwinds.

Sierra Wireless' (SWIR 0.13%) stock recently tumbled after the maker of M2M (machine-to-machine) modules and gateways posted a mixed fourth-quarter report. Its revenue fell 13% annually to $174.3 million, but beat estimates by $3.4 million.

However, it posted a non-GAAP net loss of $2.9 million, compared to a profit of $9 million a year earlier. That translated to a loss of $0.08 per share, which missed estimates by three cents. Its adjusted EBITDA plunged 85% to $2.3 million.

For the full year, Sierra's revenue and adjusted EBITDA fell 10% and 62%, respectively. For 2020, it expects its revenue to dip 0%-3%, compared to expectations for 1% growth, and for its adjusted EBITDA to tumble 29%-53%. Those headline numbers were ugly, and suggest that the stock's near-70% decline over the past three years might not be over.

Network connections across a city.

Image source: Getty Images.

However, contrarian investors will likely note that Sierra's business is cyclical, and its declines are gradually bottoming out. Is it safe to nibble on this battered stock after its post-earnings slump, or should investors wait for lower prices?

What happened to Sierra Wireless?

Sierra is the world's top manufacturer of M2M modules and gateways. It was once considered a promising play in the growing Internet of Things (IoT) market, but its growth decelerated significantly between 2014 and 2016 as macro headwinds throttled its orders and it lost pricing power in the low-margin modules market.

Sierra also relied heavily on acquisitions of smaller wireless chipmakers to boost its revenue. Its acquisition of Numerex, a producer of fully integrated device-to-cloud IoT solutions, lifted its revenue by 12% in 2017 and 15% in 2018, but that growth decelerated after the company fully lapped the acquisition.

That tough year-over-year comparison -- exacerbated by sluggish sales of its older 2G/3G embedded modules to IoT customers and weak demand across the mobile, networking and automotive markets -- caused Sierra's revenue to slide over the past four quarters as its gross margins contracted:


Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

YOY revenue growth






Gross margin*






YOY = Year-over-year. *Non-GAAP. Source: Sierra Wireless quarterly reports.

Sierra's IoT revenue declined 5% annually to $90.9 million during the fourth quarter, as declining sales of IoT modules offset its growth in higher-margin subscriptions and services revenue. Its embedded broadband revenue plunged 21% to $83.4 million as soft demand from the mobile and automotive markets offset a "modest increase" in sales to automotive customers like Volkswagen (VWAGY 0.35%).

Sierra also claims that many of its customers are buying fewer legacy 2G, 3G, and IoT modules as customers pivot toward newer LPWA (low-power wide area network), 4G, and 5G modules. In short, Sierra faces fierce macro and micro headwinds that won't wane anytime soon.

Sierra still hasn't hit a cyclical trough yet

Sierra's main turnaround strategy is to cut costs, reinvest its cash into the development of new 4G, 5G, and LPWA modules, and expand its subscription services. It expects its "annualized recurring revenue" to hit $200 million by the middle of 2022 and double to $400 million by 2024.

A network of IoT devices emerging from a finger.

Image source: Getty Images.

Sierra doesn't disclose that figure separately yet, but its comparable "subscription, support, and other" revenue hit $73 million in the first nine months of 2019, and should approach $100 million for the full year (14% of its top line) when it discloses that figure in its upcoming SEC filing.

Sierra's expansion of its subscription services should increase the stickiness of its ecosystem, boost its margins, and widen its moat. However, it's unclear if that growth can fully offset the lower margins of it legacy modules or the rising R&D, production, and marketing expenses of its next-gen modules.

Sierra's tepid outlook for 2020 suggests the headwinds will overpower the tailwinds for the foreseeable future. Sierra's business should eventually recover, but it hasn't passed a cyclical trough, and its stock remains pricey at over 40 times forward earnings.

Investors looking for a safer play on the IoT market should stick with Cisco (CSCO 1.55%), which trades at just 14 times forward earnings, pays a dividend, and is better equipped to weather the macro headwinds than Sierra. Sierra won't fade away anytime soon, but it's still too far from a cyclical trough to consider buying.

Leo Sun owns shares of Cisco Systems. 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, Inc. Stock Quote
Sierra Wireless, Inc.
$30.67 (0.13%) $0.04
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$46.61 (1.55%) $0.71
Volkswagen Aktiengesellschaft Stock Quote
Volkswagen Aktiengesellschaft
$20.38 (0.35%) $0.07

*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 08/14/2022.

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.