The share price of Internet of Things (IoT) company Sierra Wireless (NASDAQ:SWIR) has been languishing the last couple of years. And although the company has made some announcements regarding 5G wireless devices in recent months, the company's third-quarter 2020 financials indicate there is still some ground to cover before it can mount a full-fledged rebound.

Overall revenue remains in decline, and while the seeds for future growth have been planted, indications suggest it's too soon to buy-in.

Q3 by the numbers

Sierra's total revenue increased 3.6% year over year in Q3 to $180 million, although that's still below the $203 million total registered in the same period in 2018. Excluding revenue from the legacy automotive hardware segment it's selling off to a consortium of investors led by China-based Fibocom for $165 million, Sierra's Q3 sales were down 17% year over year to $113 million. However, also excluding automotive, Sierra said sales improved sequentially over the second quarter by 1.5%.

Various devices and digital services illustrated in honey comb shaped cells.

Image source: Getty Images.

Not surprisingly given the challenging business climate during the pandemic, adjusted net losses totaled $7.1 million in Q3 compared to net earnings of $1 million in 2019. Also as a result of the pandemic, Sierra still isn't providing any forward guidance for the final quarter of 2020. With the offloading of its auto segment though, it is initiating cost cuts (a recurring theme at Sierra the last few years) of $25 million to $30 million on an annualized basis to "right-size" the business after the sale.  

At the end of September, Sierra had $63.5 million in cash and equivalents and total debt of $34.4 million on the balance sheet. The good news is that the large cash infusion from the sale to Fibocom is about to go through, providing the company some much-needed liquidity to plow into research and development.  

A very long-term view needed

And that really is the key to Sierra's rebound strategy. It did make some progress in recent months and announced the availability of some 5G wireless hardware, like the world's first multi-network 5G connectivity router for vehicles and an IoT device module enabling mmWave 5G connectivity. The company expects to double down on new hardware development and IoT software and services with the $165 million payout on its legacy business.

But there is much work to be done here. IoT connectivity hardware gets commoditized quickly, and Sierra doesn't have the deep pockets or high profit margins to keep its hardware research and development in perpetual upward momentum. Even excluding the sold auto unit, adjusted gross profit margin on products sold and services rendered was a mere 34.7% in Q3 compared to 36.3% a year ago.  

Innovating on thin margins in the tech hardware world is a tough gig, so the real key isn't 5G device development, but rather continual progress in higher-margin recurring revenue services for IoT management. At this juncture, the problem is these software-based services are still a small part of Sierra's business overall. Recurring revenue was up 22% year over year, but at $29.8 million represents only about one-quarter of total sales (excluding the pending divestiture).  

To its credit, Sierra is winning new deals with its IoT service solutions, and new 5G products should help it make progress on this front. But Sierra appears to be far from being able to declare its turnaround effort is yielding results. This could be a long-term value in the making with shares trading for a meager 0.6 times trailing-12-month sales, but any cheapness implied with this stock is for a reason, given the uncertainty of its future. In the meantime, I think there are better semiconductor stocks worth purchasing right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.