There's no question which stock was the better one to own over the last three years. Shares of Qualcomm (QCOM 1.23%) are up around 45%; meanwhile, Sierra Wireless (SWIR) has lost two-thirds of its value. Qualcomm's stock benefited from shareholder-friendly dividends and share buybacks, offsetting weakness in the overall business fundamentals. Sierra Wireless stock suffered as investors lost patience waiting for profits from the Internet of Things (IoT) to materialize. But if we forget the past and looking toward the next three to five years, which stock is the better buy today?

Man against a blackboard background with question marks written on it.

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The bull case for Sierra Wireless

For 2019, Sierra Wireless reported overall revenue that fell 10% year over year to $714 million. That's not good, but the silver lining is that its net decrease in cash was only $10 million. The company ended the year with $79 million on the balance sheet and only $44 million in long-term liabilities. In other words, Sierra Wireless isn't currently in a serious financial bind. It has time to turn its operations around. But turn around it must.

The culprit for Sierra is its hardware segment. In 2019, revenue from embedded broadband hardware declined 20% year over year due to a weakening profit margin, as the sector fell victim to commoditization. The company sees this turning around eventually, as spending on 5G network infrastructure picks up speed. And many companies, including Qualcomm, agree that 5G spending is a major tailwind. But Sierra management said in its earnings call that 5G won't have a big impact in 2020.

The bull case for Sierra Wireless revolves around its budding software business. It began focusing on this recurring subscription-based revenue late 2018, offering IoT software solutions. For 2019, it hauled in $99 million, and is on pace for $125 million in 2020. Management expects this 2019 revenue to double by 2022 to $200 million, and to double again to $400 million by mid-2024.

Sierra's business is divided into two segments: IoT solutions and embedded broadband. The gross margin for IoT solutions was 37% in 2019, compared with 24% for embedded broadband. The company didn't provide specifics, but did suggest on the most recent conference call that its margin on recurring revenue is even higher. As recurring revenue makes up a larger percentage of Sierra Wireless' total, overall profitability should increase dramatically. That could lead to market-beating returns, considering the company's basement valuation. It currently trades below book value and at 0.4 times sales.

The bull case for Qualcomm

Qualcomm's revenue in 2019 (excluding a one-time $4.7 billion payment from Apple) came in at $19.4 billion. That was down around 14% from 2018. That's not good, but the company has been able to generate positive returns by drastically reducing its outstanding shares.

QCOM Chart

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Qualcomm announced a $30 billion share buyback plan in July 2018, and has repurchased close to $24 billion since then. So although revenue is down, earnings per share are up dramatically. The company had $3.59 EPS in 2019. It also increased its dividend by 4% to $2.48, good for a payout ratio of 69%. With roughly $6 billion left on the buyback, look for further EPS gains and dividend payouts.

While these are shareholder-friendly moves, they don't speak to business longevity -- crucial for long-term investors. Qualcomm is the mobile-phone chip leader in 5G networks, with many phones coming out in 2020. This bodes well for Qualcomm, although 5G is still relatively small. When looking at the company's shipping estimates for 2020, 5G product shipments are forecast to be only 10% of the total. So this will take time to develop. But you get a nice dividend while you wait.

The better buy

Qualcomm isn't without risk. Its business model is in question as the Federal Trade Commission claims it has anti-competitive practices. Previously, courts ruled in the FTC's favor, but the implementation is on hold as Qualcomm appeals. The Trump administration openly supports Qualcomm. That means that different branches of government are divided on the issue -- further casting a cloud over the eventual outcome.

But here's why I wouldn't choose Sierra Wireless. The company is guiding for $400 million in recurring IoT service revenue in 2024. That means that its growth rate for this segment needs to accelerate. For 2020, it's only guiding for 15% organic growth for the segment, and only 25% revenue growth when including its January 2020 acquisition of M2M Group, which focuses on IoT services and cellular devices in Australia. Assuming $125 million in recurring revenue in 2020, this segment must grow at around a 35% compound annual growth rate to reach $400 million in 2024. 

In other words, Sierra Wireless isn't yet on pace to hit its targets. Considering how underwhelming the company has been over the years, I wouldn't consider investing until revenue growth is at least accelerating toward its stated goal.

Given what we've seen, I'd select Qualcomm if I had to pick one of these two today. But that decision reflects pessimism toward Sierra Wireless, more than optimism toward Qualcomm.