Sierra Wireless' (NASDAQ:SWIR) 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:

Metric

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

YOY revenue growth

10%

(7%)

(5%)

(14%)

(13%)

Gross margin*

32.7%

31.5%

30.8%

31.7%

29.5%

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 (OTC:VWAGY).

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 (NASDAQ:CSCO), 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.