The Internet of Things hasn't been the boon to connectivity chipmaker Sierra Wireless (SWIR) that many investors thought it would be. Hardware in the industry has been commoditized, the company is still working on its 5G mobile networks technology, and software and services (where the money really is) haven't equated to growth for Sierra. Adding a U.S.-China trade war to the mix in 2018 and 2019 didn't help matters.

If the small hardware outfit wasn't floundering enough, the global spread of COVID-19 has come at a particularly inopportune time for the company. While many chipmakers started to show signs of a rebound late in 2019, Sierra was still forecasting another decline in sales for 2020. Things are thus likely to get a lot worse before they get better.

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Transition to services is the long game

First the bad news. In 2019, Sierra's embedded broadband segment (WiFi and cellular chips and routers) sales fell 20% to $336 million. That was only partially mitigated by a 1% rise in IoT solutions to $378 million. Within IoT, hardware was again a drag, with the segment notching an overall meager gain thanks to recurring service and software revenue from managed IoT solutions.  

All told, it equated to overall sales falling 10% in 2019, and Sierra swinging to an adjusted loss of $0.3 million compared with adjusted earnings of $32.4 million in 2018. With its focus on hardware suffering from commoditization, there's little hope for a quick recovery in the top line.  

And that's what's so concerning now that coronavirus is creating both supply and demand-side disruption around the globe. Even before COVID-19 was upgraded to pandemic status, Sierra was forecasting sales to fall as much as 3% in 2020 -- with hardware again the culprit, offset by 25% growth in recurring services to $125 million. Since then, clouds have gathered around the global economic outlook, with other chipmakers that reported later than Sierra factoring in at least some mild disruption. I think there's a good chance the numbers are in need of updating, and not in a positive way.  

Of course, I still believe coronavirus will be beaten and that the world will have moved on by the end of 2020. But Sierra's longer-term forecast for services revenue to double to $200 million by mid-2022 and double again to $400 million by 2024 is looking over-ambitious at this point.  

Not exactly a big cushion

With the forecast already not great and macroeconomic events outside of its control now in play, it's worth mentioning Sierra's balance sheet. While by no means in poor shape, cash and equivalents of $75.5 million at the end of 2019 covers at least a quarter or two of operating expenses (full-year 2019 operating expenses were $278 million). Cash also exceeds total debt of $43.8 million, so Sierra has wiggle room. However, its war chest does look limited if business starts to deteriorate.  

Given the situation, it's no wonder Sierra Wireless' stock has been cut in half during the market rout. If it can limit the damage and still keep the sales spigot running, it's very likely shares have been oversold and are currently going for a value. However, for now, this is more of a stock trader's asset than anything else -- at least until the company can show some sign of reversing the multiyear slide it's been stuck in. For those wanting to bet early, there could be value to be had in this operation, but I think there are better places to invest in the semiconductor space at the moment.