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Here's Why Sierra Wireless Stock Is Trading Much Higher Today

By Jon Quast – Updated Jul 24, 2020 at 2:54PM

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It's getting rid of a low-margin hardware business to continue focusing on growing its recurring revenue.

What happened

Shares of Sierra Wireless (SWIR) are trading much higher today because the company is selling one of its product lines for a whopping $165 million. The move allows it to focus more on its Internet of Things (IoT) solutions, and investors undoubtedly like the sound of that.

As of 2:30 p.m. EDT on Friday, Sierra Wireless stock was up 19%. Before today, shares were flat in 2020, having already recovered from big losses earlier in the year. But today's gains push it into positive territory. 

SWIR Chart

SWIR data by YCharts.

So what

Hong Kong's Rolling Wireless is buying Sierra Wireless' product line for automotive embedded modules. And it appears Sierra is getting good value for it. This line did $166 million in revenue in 2019, so the deal is roughly valued in line with sales. That's far better than Sierra Wireless' price-to sales ratio (the company is valued at about 50% of sales).

Sierra's hardware business has been a source of frustration for the company in recent years. Sales have fallen in many areas, but automotive modules were a rare bright spot in 2019. Although this product line showed growth in 2019, it has a lower margin. Therefore, while sales are growing, it's not very lucrative. For that reason, it makes sense for Sierra Wireless to divest this part of the business.

A row of progressively taller stacks of wooden blocks are all topped with an upward pointing arrow.

Image source: Getty Images.

Now what

Today's move is consistent with the direction in which CEO Kent Thexton has been taking the company. Thexton wants to capitalize on the IoT by generating recurring revenue through software and services. In 2019, recurring revenue grew to $99 million, and it's expected to grow to $125 million in 2020.

Selling a hardware unit of the business makes sense if the company is focusing on recurring revenue. The $165 million will provide a lot of capital that can be used to aid in this crucial business pivot. It will take time to see the benefit from today's deal, but it appears to be a smart move.

Jon Quast owns shares of Sierra Wireless. The Motley Fool owns shares of and recommends Sierra Wireless. The Motley Fool has a disclosure policy.

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